Surcharge in Income Tax – Introduction, Rates and Calculation.
A brief look at the concept of surcharge in income tax
In this post, we will briefly overview the surcharge in income tax. We will then explore the following topics in more detail:
What is Surcharge?
A surcharge is an additional amount collected during a payment. This will be charged on the derived income rather than the original income.
What is the surcharge in Income Tax?
When you earn more money, you have to pay more taxes. But, sometimes, a minor increase in income may lead to a great extent of tax liability.
To overcome this, the Indian Income Tax Department has a “marginal relief” rule that helps you pay a bit less tax when your earnings marginally exceed the limit. It’s like a small break to ensure you don’t have to pay much more taxes simultaneously.
Marginal relief ensures that the increase in income tax is not more than the increase in income.
Let’s imagine person A earns INR 51 lakh in a year. Due to an increase in income by INR 1 Lakh, A has to pay an added 10% surcharge on his taxes. But had he earned INR 50 lakh, this surcharge would not have been applicable.
The marginal relief calculation goes as follows;
- In the case of INR 51 lakh earnings, they need to pay 30% tax plus the 10% surcharge, totalling INR 14,76,750.
- However, if the earning was INR 50 lakh, they only need to pay a 30% tax, amounting to INR 13,12,500.
- This means earning just INR 1 lakh more results in significantly higher taxes. It’s like a penalty for surpassing the INR 50 lakh mark. The concept of “marginal relief” comes into play to reduce this additional tax burden.
- For someone earning INR 51 lakh, marginal relief provides help. It considers the extra tax paid (INR 14,76,750 – INR 13,12,500), which equals INR 1,64,250, and subtracts the additional income over INR 50 lakh, which is INR 1 lakh (INR 1,64,250 – INR 1,00,000). Therefore, person A receives a relief of INR 64,250.
- Hence, the income tax liability on the income of Rs. 51,00,000 will be Rs.14,12,500 (excluding cess)
Surcharge rates for different taxpayers
Given below are the different surcharge rates under the Income Tax.
Domestic Company
Taxpayer | Income limit | Surcharge Rate |
Individual/HUF/AOP/BOI/ Artificial Judicial Person | Net income is over Rs.50 Lakhs but doesn’t exceed Rs. 1 Crore | 10% |
Over Rs.1 Crore but not more than Rs 2 crore | 15% | |
Over Rs.2 Crore but not more than Rs 5 crore | 25% | |
Over Rs.5 Crore | 37% | |
However, the surcharge will be leviable @ 15% if both the following conditions are satisfied; 1. The net income (including income by way of dividend or income under section 111A and section 112A) exceeds INR 2 Crores; and 2. Is not covered under Point 3 or Point 4 of the table above. Also, If the taxable income of an Individual is more than Rs 5 crores and opt for new tax regime, then the individual can pay a reduced surcharge of 25% instead of the 37% earlier. | ||
Firm/LLP/Local authorities | Over Rs.1 Crore | 12% |
Co-operative Society | Over Rs.1 Crore | 12% |
Have option to pay tax as per section 115BAD of the Income Tax Act | 10% | |
Domestic Company | Over Rs.1 Crore but not more than Rs. 10 Crores | 7% |
Over Rs 10 Crore | 12% | |
Foreign Company | Over Rs.1 Crore but not more than Rs. 10 Crores | 2% |
Over Rs.10 Crores | 5% | |
Marginal Relief of Surcharge
When you earn more money, you have to pay more taxes. But, sometimes a minor increase in income may lead to a great extent of tax liability.
To overcome this, the Indian Income Tax Department has a rule called “marginal relief” that helps you pay a bit less tax when your earnings marginally cross the limit. It’s like a small break to make sure you don’t have to pay a lot more taxes all at once.
Marginal relief ensures that the amount of increase in income tax is not more than the amount of increase in income.
Let’s imagine person A earns INR 51 lakh in a year. Due to an increase in income by INR 1 Lakh, A has to pay an added 10% surcharge on his taxes. But had he earned INR 50 lakh, this surcharge would not have been applicable.
The marginal relief calculation goes as below;
- In the case of INR 51 lakh earnings, they need to pay 30% tax plus the 10% surcharge, totaling INR 14,76,750.
- However, if the earning was INR 50 lakh, they only need to pay a 30% tax, amounting to INR 13,12,500.
- This means that earning just INR 1 lakh more results in significantly higher taxes. It’s like a penalty for surpassing the INR 50 lakh mark. To reduce this additional tax burden, the concept of “marginal relief” comes into play.
- For someone earning INR 51 lakh, marginal relief provides help. It considers the extra tax paid (INR 14,76,750 – INR 13,12,500), which equals INR 1,64,250, and subtracts the extra income over INR 50 lakh, which is INR 1 lakh (INR 1,64,250 – INR 1,00,000). Therefore, person A receives a relief of INR 64,250.
- Hence, income tax liability on income of Rs. 51,00,000 will be Rs.14,12,500 (excluding cess).
Calculation of surcharge
Let us see a couple of examples to understand the surcharge and marginal relief concept.
Ex-1: Kalpana has a net annual income of Rs 65 Lakhs. Now, we will see the procedure of calculating her income tax and surcharge.
Step-1: Calculating income tax for actual income
Rs. 0 – 2.5 Lakhs @ 0% = 0
Rs. 2,50,000 – Rs 5,00,000 @ 5% = Rs 12,500
Rs. 5,00,000 – Rs 10,00,000 @ 20% = Rs 1,00,000
Rs. 10,00,000 – Rs 55,00,000 @ 30% = Rs 16,50,000
Total Tax calculated = Rs 17,62,500
Add: Surcharge @ 10% = Rs 1,76,250
Total Tax + Surcharge = Rs 19,38,750
Step-2: Calculating income tax for 50L
(Rs 12,500 + Rs 1,00,000 + Rs 12,00,000) = Rs 13,12,500
Step-3: Calculating the excess liability
Excess Tax Payable = Value from step-1 – Value from step-2
= Rs. (19,38,750) – (13,12,500)
= Rs. 626,250
Step-4: Calculating Marginal relief
Marginal relief = Excess Tax Payable – (Income which is more than 50 Lakhs)
= 626,250 – 15,00,000 (65 lakh – 50 lakh)
= -873750
Since this amount is in negative, there is no marginal relief applicable.
NOTE: Only if the marginal relief amount is positive will such amount be reduced from the total tax payable amount.
Step-5: Tax Payable calculation
Since there is no marginal relief applicable in this case, the tax payable amount is the one that was calculated in step 1, i.e., Rs. 19,38,750.
Ex-2: Harish has a net annual income of Rs 51 Lakhs. Now, we will see the procedure of calculating her income tax and surcharge.
Step-1: Calculating income tax for actual income
Rs. 0 – 2.5 Lakhs @ 0% = 0
Rs. 2,50,000 – Rs 5,00,000 @ 5% = Rs 12,500
Rs. 5,00,000 – Rs 10,00,000 @ 20% = Rs 1,00,000
Rs. 10,00,000 – Rs 41,00,000 @ 30% = Rs 12,30,000
Total Tax calculated = Rs 13,42,500
Add: Surcharge @ 10% = Rs 1,34,250
Total Tax + Surcharge = Rs 14,76,750
Step-2: Calculating income tax for 50L
(Rs 12,500 + Rs 1,00,000 + Rs 12,00,000) = Rs 13,12,500
Step-3: Calculating the excess liability
Excess Tax Payable = Value from step-1 – Value from step-2
= Rs. (14,76,750) – (13,12,500)
= Rs. 1,64,250
Step-4: Calculating Marginal relief
Marginal relief = Excess Tax Payable – (Income which is more than 50 Lakhs)
= 1,64,250 – 1,00,000 (51 lakh – 50 lakh)
= 64,250
Step-5: Tax Payable calculation
Tax Payable = Total Tax – Marginal relief
= 14,76,750 – 64,250
= 14,12,500
After the Marginal relief, the total tax payable is Rs 14,12,500 (excluding cess)
FAQ's
1.Do I have to pay a surcharge on income tax?
Ans: Yes, if your income for a financial year goes beyond Rs. 50 lakh, you’re required to pay an extra surcharge on top of the regular tax amount.
2.Can individuals claim marginal relief?
Ans: All individuals subject to surcharge can avail themselves of marginal relief.
3.What's the update on the income tax surcharge for 2023?
Ans: If your taxable income exceeds Rs 5 crores and you choose the new tax regime, you’ll now face a lower surcharge of 25%, down from the previous 37%.
