What is Surcharge on Income Tax and How To Calculate Marginal Relief
If you are in the higher income tax bracket, you may know that you have to pay an additional tax called a surcharge. This is an additional tax imposed on existing taxes for taxpayers having an income over a specified limit. The provision of marginal relief ensures that a minor increase in your taxable income does not lead to a significant increase in surcharge.This post helps you understand the concept of surcharge and marginal relief, surcharge rates and calculation of marginal relief for individuals, firms and companies. Read on!
What is Surcharge and How Does it Work?
A surcharge is an additional charge imposed on tax payable and not on income generated. For example, a 10% surcharge on an existing tax rate of 20% would increase the total taxes to 22%. The Government of India (GOI) introduced surcharges for taxpayers in the higher income tax brackets to make sure that rich people paid more taxes.
A 10% surcharge is applicable for individuals and HUFs (Hindu Undivided Family) with a net taxable salary between Rs. 50 lakh and Rs. 1 crore. After this, surcharge rates for individuals and HUFs are 15%, 25%, and 37% for income brackets of Rs. 1-2 crore, Rs. 2-5 crore and over Rs. 5 crores, respectively.
Surcharge for domestic corporations starts at 5% for net income between Rs. 1 crore to Rs. 10 crores. For foreign corporations, surcharges start at a 2% rate for income between Rs. 1 crore to Rs. 10 crores. In certain cases, taxpayers could be liable to pay surcharges even if their income marginally exceeds the prescribed amount. That is why the GOI introduced marginal relief on surcharges to provide them relief from higher taxation.
Rates of Surcharge for Different Taxpayers
A surcharge is an excess tax payable on your income tax. The government imposes a surcharge if a taxpayer’s total earnings go beyond the minimum limit. All companies and individuals whose earnings exceed Rs. 1 crore and Rs. 50 lakh respectively pay the surcharge.
As per the Income Tax Act, 1961, various surcharge slabs exist for different taxpayers.
| Taxpayer | Net Income Limit | Rate of Surcharge |
| Foreign company | Above Rs. 10 crores | 5% |
| Foreign company | Above Rs. 1 crore to Rs. 10 crores | 2% |
| Domestic company | Above Rs. 10 crores | 12% |
| Domestic company | Above Rs. 1 crore to Rs. 10 crores | 7% |
| Co-operative society/ Local authorities/LLP/Firm | Above Rs. 1 crore | 12% |
| Artificial Juridical Person/BOI/AOP/HUF/Individual | Above Rs. 5 crores | 37% |
| Artificial Juridical Person/BOI/AOP/HUF/Individual | Above Rs. 2 crores to Rs. 5 crores | 25% |
| Artificial Juridical Person/BOI/AOP/HUF/Individual | Above Rs. 1 crore to Rs. 2 crores | 15% |
| Artificial Juridical Person/BOI/AOP/HUF/Individual | Above Rs. 50 lakh to Rs. 1 crore | 10% |
In Budget 2022, the Finance Minister restricted the surcharge rate for AOPs (Association of Persons) having companies as members to 15%. It applies to AOPs with earnings above Rs. 2 crores in a fiscal year.
Furthermore, the government restricts the surcharge rate on LTCG (long-term capital gains) earned from units and listed equity shares to 15%.
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Computation of Surcharge
The Income Tax Department takes into account the earnings from five different income heads to calculate the GTI or Gross Total Income. Next, it subtracts multiple tax deductions under Chapter VI A from this GTI to arrive at your total net income. Tax is computed on this income.
The tax rate is based on whether a taxpayer is a domestic company, a firm or an individual. After tax computation, the surcharge rate is applied to the tax amount. This means that the government calculates a surcharge on your income tax (not on your income).
The chart below indicates the details of two individual taxpayers during FY 2018-19:
| Particulars | Individual A | Individual B |
| Taxable income | Rs. 52,00,000 | Rs. 46,00,000 |
| Tax payable post relief under Section 87A | Rs. 13,72,500 | Rs. 11,92,500 |
| Surcharge | Applicable | Not Applicable |
| 10% Surcharge | Rs. 1,37,250 | – |
| Tax payable (with surcharge) | Rs. 15,09,750 | Rs. 11,92,500 |
| 1% SHEC and 2% education cess | Rs. 45,293 | Rs. 35,775 |
| Total tax liability | Rs. 15,55,043 | Rs. 12,28,275 |
What is the Meaning of Marginal Relief?
Marginal relief refers to tax relaxation on the levy of surcharge given to a taxpayer whose taxable income is beyond the prescribed limit. Marginal tax makes sure that the amount of increase in income tax is not more than the increase in income.
The marginal relief is equal to taxes payable on income above the prescribed limit minus the amount of income above the limit. It is available only on surcharge and not on health and education cess.
Marginal Relief for Individuals, Firms and Domestic Companies
The government grants marginal relief to a taxpayer who has to pay a surcharge as his/her earnings marginally go above the specified limit. Let’s understand how this concept works for individuals, firms and companies!
1. For Individuals
Case A: Rohit has earned Rs. 51 lakh in the financial year 2020-21.
- He is liable to pay taxes with a 10% surcharge, and his tax payable is Rs. 14,76,750.
- However, for an income of Rs. 50 lakh, the total tax liability should have amounted to Rs. 13,12,500 (without cess).
- This means that for an additional income of Rs. 1 lakh, he ends up with a tax worth Rs. 1,64,250. To avoid any additional tax, there must be a reduction in Rohit’s tax liability.
- So, he will be entitled to a marginal relief of Rs. (1,64,250 – 1,00,000) = Rs. 64,250. Here, Rs. 1,64,250 = Rs. (14,76,750 – 13,12,500) and Rs. 1,00,000 = Rs. (51,00,000 – 50,00,000).
- So, Rohit’s tax liability for Rs. 51 lakh is Rs. 14,12,500.
Case B: Jay has earned Rs. 1.01 crore during a fiscal year.
- He is liable to pay taxes with a 15% surcharge, and his tax payable is Rs. 32,68,875.
- However, for earnings of Rs. 1 crore, the total tax liability should have amounted to Rs. 30,93,750. Hence, for an additional income of Rs. 1 lakh, he ends up with a tax liability worth Rs. 1,75,125.
- For this, he will be entitled to a marginal relief of Rs. (1,75,125 – 1,00,000) = Rs. 75,125. Here, Rs. 1,75,125 = Rs. (32,68,875 – 30,93,750) and Rs. 1,00,000 = Rs. (1.01 crore – 1 crore).
- So, Jay’s tax liability for an income of Rs. 1.01 crore is Rs. 31,93,750.
2. For Firms
A 12% surcharge is applicable on income tax when a firm’s income exceeds Rs. 1 crore. So, taxpayers with income above Rs. 1 crore will get marginal relief. Suppose Firm A’s income is Rs. 1.01 crore; then it is liable to pay tax with a 12% surcharge, and its tax payable is Rs. 32,24,000.
For an income of Rs. 1 crore, the total tax liability should have amounted to Rs. 31,20,000. This means that for an extra income of Rs. 1 lakh, it ends up with a tax liability worth Rs. 1,04,000. So, the marginal relief for Firm A is Rs. (1,04,000 – 1,00,000) = Rs. 4,000.
3. For Domestic Companies
Case A: When a domestic company’s income is above Rs. 10 crores, a 12% surcharge will be applicable. Furthermore, if a foreign company’s income is above Rs. 10 crore, a 5% surcharge will be applicable.
Companies with an income above Rs. 10 crores will get marginal relief for the prescribed surcharge. The tax payable (with surcharge) on higher earnings must not surpass the tax liability on Rs. 1,00,00,000 by more than the earnings that go beyond Rs. 10,000,000.
Case B: If a domestic company’s income is above Rs. 1 crore, and not more than Rs. 10 crores, a 7% surcharge will be applicable. Furthermore, when a foreign company’s income is above Rs. 1 crore but below Rs. 10 crores, a 2% surcharge will be applicable.
Final Word
A surcharge is basically a tax on income tax. The government levies it on the tax payable (not on your income). So, before filing your ITR for a financial year, you must calculate the surcharge on your income tax. Marginal relief ensures that a small increase in your income does not increase your income taxes by a wide margin. Whether a taxpayer is an individual, HUF, firm or a domestic/foreign company, marginal relief benefits everyone with fair taxation.
FAQs
Ans: The Government of India collects income tax in the following ways:
• Equalisation levy
• TCS (Tax Collected at Source)
• TDS (Tax Deducted at Source)
• When taxpayers make payments by way of self-assessment tax and advance tax
Ans: The Income Tax Department has categorised a taxpayer’s income under the following heads:
• Income from capital gains
• Income from Profits and gains of profession or business
• Income from other sources
• Income from salary
• A taxpayer’s total income from all these categories is called gross total income.
Ans: The tax authority subtracts certain deductions (under Sections 80C to 80U) from your gross total income. After such deductions, the outstanding income is termed your total income. Tax is applicable to your total income.
Ans: For FY 2021-22, BOI, AOP, HUF, and individuals with income up to Rs. 2.5 lakh are fully tax-exempt. Resident individuals in the age group between 60 years and below 80 years can avail of an exemption limit of Rs. 3 lakh. Similarly, resident individuals in the age bracket of 80 years and above can opt for an exemption limit of Rs. 5 lakh.
Ans: The Finance Minister announced that the surcharge on long-term capital gains (LTCG) from all financial assets would be capped at 15%. The FM also said that the surcharge for AOPs with a total income of Rs. 2 crore and having only companies as members would be capped at 15%.
Ans: The following are the surcharge rates for individuals, HUFs, AOPs, BOIs and Artificial Juridical Persons:
• From Rs. 50 lakh to Rs. 1 crore: 10%
• From Rs. 1 crore to Rs. 2 crore: 15%
• From Rs. 2 crores to Rs. 5 crore: 25%
• Rs. 5 crores and above: 37%
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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