Demystifying Surcharge on Income Tax and Marginal Relief

When any taxpayer comes under an income tax rate above 30%, the taxpayer is liable to pay an additional surcharge on income tax liability. The government levies surcharge where high net-worth individuals contribute to income tax. The surcharge helps to maintain a balance between the tax payments made by poor and rich individuals. However, the government also provide marginal relief to taxpayers on surcharge.

Table of Contents

• What is Surcharge?
• Total Tax Payable on Surcharge 
• Surcharge Rate 
• Marginal Relief on Surcharge

What is Surcharge?

The surcharge is an additional fee paid for some services or social causes. Usually, it is not included in the quoted price of goods and services. The surcharge is levied for individuals as well as companies. For individuals, the surcharge is applicable on income above 50 lakhs, and for companies, it is charged above Rs 1 crore. 

Surcharge Updates in India

• High-income tax adjustment: Since April 1, 2023, the new tax regime will see a reduction in the surcharge rate for incomes exceeding 5 crore rupees. The rate will decrease from 37% to 25% which lowers the maximum marginal tax rate from 42.74% to 39%. This change applies exclusively to taxpayers opting for the new tax structure.
• Enhanced tax relief for lower incomes: Under the new tax system, a significant tax rebate has been introduced. Individuals earning up to 7 lakh rupees annually will now be exempted from paying income tax. This measure effectively raises the tax-free income threshold, providing financial relief to a broader segment of taxpayers.

Total Tax Payable on Surcharge

The total tax payable including surcharge on income tax depends on various factors such as the total income of the taxpayer, the applicable income tax slab, and the surcharge rate. Surcharge is an additional tax levied on the amount of income tax calculated based on the taxpayer's total income. Here's a general guide on how to calculate it:

• Determine the Income Tax Liability: First, calculate your income tax based on the applicable slab rates for your total income.
• Calculate Surcharge: Depending on your income bracket, apply the relevant surcharge rate to your income tax liability. For example, if your total income is more than Rs. 50 lakh but less than Rs. 1 crore, a 10% surcharge is applicable on the income tax.
• Add Cess: After adding the surcharge, apply the Health and Education Cess, which is typically 4% of the income tax plus surcharge.
• Calculate Total Tax Payable: The sum of the income tax, surcharge, and cess gives the total tax liability.

Here's a simplified formula:

Total Tax Payable=Income Tax + (Income Tax × Surcharge Rate) +((Income Tax+ (Income Tax × Surcharge Rate)) × Cess Rate)

For example, if an individual's income tax comes to Rs. 10 lakh and they fall into a surcharge bracket of 10%, the surcharge would be Rs. 1 lakh (10% of Rs. 10 lakh). Adding the 4% cess on Rs. 11 lakh (Rs. 10 lakh income tax + Rs. 1 lakh surcharge), the total tax payable would be Rs. 11 lakh + Rs. 44,000 (4% of Rs. 11 lakh) = Rs. 11.44 lakh.

Surcharge Rate

The surcharge rates applicable to different taxpayers for the Financial Year 2023-24 (AY 2024-25) in India are as follows as per the income tax act:

1. For Individuals

In case you are opting for the new tax regime or old tax regime, then for Individuals, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), and Artificial Judicial Persons.  As per the law w.e.f. 1st April 2023, the highest surcharge rate of 37% will be reduced to 25% as per the new tax regime.

2. For Partnership Firms (including LLPs):

• • 12% surcharge on income tax is applied if the total income exceeds one crore rupees. Marginal relief is available in this case as well.
    Domestic Companies:

3. For companies

• That opt for taxation under Section 115BA, 115BAA, and 115BAB, different tax rates apply. The surcharge rates for these companies are:
  • 25% tax rate under Section 115BA.
  • 22% tax rate under Section 115BAA.
  • 15% tax rate under Section 115BAB.
• Do not opt for these sections, the tax rate is generally 30%. The surcharge is applied at different rates based on the income level:
  • 7% when total income surpasses Rs.1 crore but remains below Rs.10 crore.
  • 12% if total income surpasses Rs. 10 crores.

4. For Foreign Companies:

• • 2%: if the total income surpasses Rs. 1 crore but is up to Rs. 10 crores.
  • 5%: if the total income surpasses Rs. 10 crores.

For both domestic and foreign companies, there is also a Health and Education Cess, which is levied at 4% on the amount of income tax plus surcharge.

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Marginal Relief on Surcharge

Marginal relief is a tax benefit that aims to ease the burden of surcharges levied on taxpayers. By limiting the additional tax due to a surcharge, it ensures a smoother tax climb 

for both individuals and entities. Here's how it works for different categories:

Individuals and Hindu Undivided Families (HUFs):

• Applicable on: If your total income after deductions exceeds Rs. 50 lakh, a 10% surcharge is levied on income exceeding Rs. 50 lakh.
• Relief Calculation: The maximum additional tax payable due to the surcharge is restricted to the amount of income exceeding Rs. 50 lakh.
• Example: Your taxable income is Rs. 55 lakh. Without relief, you'd pay a surcharge of Rs. 50,000 (10% of Rs. 5 lakh). However, with marginal relief, your maximum additional tax is Rs. 5 lakh (income exceeding Rs. 50 lakh), effectively reducing your surcharge burden.

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Domestic Companies:

• Applicable on: If your net profit exceeds Rs. 1 crore, a 7% surcharge is levied on income exceeding Rs. 1 crore.
• Relief Calculation: Similar to individuals, the maximum additional tax due to the surcharge is limited to the income exceeding Rs. 1 crore.
• Example: Your company's net profit is Rs. 1.1 crore. Without relief, you'd pay a surcharge of Rs. 7,000 (7% of Rs. 10 lakh). With marginal relief, your maximum additional tax is Rs. 10 lakh, providing significant savings.

Foreign Companies:

• Applicable on: Two different rates apply: a 2% surcharge on income exceeding Rs. 1 crore and a 5% surcharge on income exceeding Rs. 10 crore.
• Relief Calculation: The maximum additional tax principle applies based on the applicable surcharge rate and income thresholds.
• Example: A foreign company has a net profit of Rs. 12 crore. Their surcharge liability without relief would be Rs. 14 lakh (2% of Rs. 1 crore + 5% of Rs. 2 crore). With marginal relief, their maximum additional tax is Rs. 2 crore (income exceeding Rs. 10 crore), bringing a substantial reduction in their surcharge burden.

Partnership Firms:

• Applicable on: If the firm's total income exceeds Rs. 1 crore, a 12% surcharge is levied on income exceeding Rs. 1 crore.
• Relief Calculation: The same principle applies as for domestic companies and individuals, limiting the maximum additional tax to the income exceeding Rs. 1 crore.