Surcharge on Income Tax & Marginal Relief

There are different rates of surcharge applicable to different taxpayers under the Income Tax Act, 1961. Basically, surcharge is progressive in all cases.

Feb 20, 2020 10:02 IST India Infoline News Service

If you are in the higher income category earning above Rs50 lakhs or if you are in the super higher income category earning more than Rs1cr per annum, then you are liable to a higher rate of effective tax. This higher tax comes in the form of surcharge, which is specifically levied under the Income Tax Act only above a certain threshold of income. This surcharge on income tax is in sync with what is known as progressive taxation meaning the rich pay a larger proportion of their income as taxes.
 

Calculation of income tax surcharge for different income levels

 
There are different rates of surcharge applicable to different taxpayers under the Income Tax Act, 1961. Basically, surcharge is progressive in all cases.
 

Taxpayer

Income limit

Surcharge Rate on the amount of income tax

Individual/HUF/AOP/BOI/ Artificial Judicial Person

Net income exceeds Rs50 lakhs but doesn’t exceed Rs1cr

10%

Individual/HUF/AOP/BOI/ Artificial Judicial Person

Net income exceeds Rs1cr but doesn’t exceed Rs2cr

15%

Individual/HUF/AOP/BOI/ Artificial Judicial Person

Net income exceeds Rs2cr but doesn’t exceed Rs5cr

25%

Individual/HUF/AOP/BOI/ Artificial Judicial Person

Net income exceeds Rs5cr

37%

Firm/LLP/Local authorities/Co-operative Society

Net income exceeds Rs1cr

12%

Domestic Company

Net income exceeds Rs1cr but doesn’t exceed Rs10cr

7%

Domestic Company

Net income exceeds Rs10cr

12%

Foreign Company

Net income exceeds Rs1cr but doesn’t exceed Rs10cr

2%

Foreign Company

Net income exceeds Rs10cr

5%


 

Understanding marginal relief for individual tax payers

 
Where total income (taxable income) is more than Rs50 lakhs but does not exceed Rs1cr, taxpayers have to pay surcharge at 10% on the income tax computed. But, this can create anomalies at times. Consider this example.
 
If an individual has taxable income of Rs51 lakhs, his tax inclusive of surcharge of 10% will be Rs14.77 lakhs. But, if he earned only Rs50 lakhs, the tax liability would have been just Rs13.12 lakhs. In short, for earning an additional Rs1 lakh he will end up paying additional income tax of Rs1.64 lakhs. In this case, the assessee will get marginal relief of the difference amount. The marginal relief will be Rs64,250.
 
Let us take another scenario where the assessee earns more than Rs1cr but less than Rs2cr, in which case surcharge of 15% will be levied. Now, if he earns Rs1.01cr he will have to pay tax inclusive of surcharge worth Rs32.69 lakhs. In short, for earning an extra Rs1 lakh, he ends up paying additional tax of Rs1.75 lakhs. Here the assessee will get marginal relief of the difference amount i.e. Rs75,125.
 

How is marginal relief calculated for partnership firms?

 
In case of firms, if the taxable income is more than Rs1cr, a surcharge of 12% will be levied on the tax payable. Here again marginal relief will be applicable. For example, for total income of more than Rs1cr i.e. the income tax payable (including surcharge) on the higher income should not exceed the income tax payable on Rs1cr by more than the amount of income that exceeds Rs1cr. For example, if the total income of a firm is Rs1.01cr, it will have to pay an income tax inclusive of a surcharge of 12% on the tax computed of Rs32.24 lakhs. But, if total income had been Rs1cr, then tax payable would have been Rs31.20 lakhs. Here the firm will get a marginal relief of the difference amount between the excess tax payable on higher income i.e. (Rs1,04,000) and the amount of income that exceeds Rs1cr i.e. (Rs1,00,000, in this case). The marginal relief will be Rs4,000 (Rs1,04,000 minus Rs1,00,000).
 

How marginal relief is calculated for domestic companies?

 
We can look at two distinct cases here to grasp this point better. Let us look at Case 1, where the total income of a domestic company is more than Rs1cr but, does not exceed Rs10cr, surcharge of 7% will be levied. Marginal relief will be provided to such companies having a total income of more than Rs1cr but less than Rs10cr. In such cases, the income tax payable (including surcharge) on the higher income should not exceed the income tax payable on Rs1cr by more than the amount of income that exceeds Rs1cr.
 
Alternatively, where the total income of a domestic company is more than Rs10cr, a surcharge of 12% will be levied on the income tax payable. Marginal relief will only be provided to such domestic companies having a total income of more than Rs10cr i.e., the income tax payable (including surcharge) on the higher income tax should not exceed the income tax payable on Rs10cr by more than the amount by which income exceeds Rs10cr.
 
Surcharge is an additional impost on all classes of assessees and in the last 2019 budget the government actually broadened the number of levels above Rs50 lakhs and progressively made higher rates applicable for higher income levels.

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