Individuals having income(s) above Rs 50 lakh have to pay an additional tax which is known as ‘surcharge’. However, the surcharge rates are structured under specified income slabs. In Budget 2023, the highest surcharge rate applicable to those individuals who earn more than Rs 5 crore was reduced from 37% to 25% provided these individuals chose the new tax regime.

“Individuals earning higher income are charged an additional charge above tax which is known as a surcharge. It’s worth noting that in Budget 2023, the highest surcharge rate of 37% was reduced to 25% under the new tax regime, effective from 1st April 2023. This move brought down the effective tax rate from 42.74% to 39%,” says Abhishek Soni, co-founder, Tax2Win, a tax filing assistance company.

What are the slabs of surcharge?

The surcharge rates under both old and new tax regimes are structured as follows:

Income (INR) Old Tax Regime New Tax Regime
Less than 50,00,000 Nil Nil
50,00,001 upto 1,00,00,000 10% 10%
1,00,00,001 upto 2,00,00,000 15% 15%
2,00,00,001 upto 5,00,00,000 25% 25%
More than 5,00,00,001 37% 25%

Source: Akhil Chandna, Partner, Grant Thornton Bharat

How is the surcharge calculated and levied?

Soni shares an example of how to calculate a surcharge:

Example: The taxable income of a salaried individual is Rs 53 lakh. In this case, since the taxable income of the individual is more than Rs 50 lakh but less than Rs 1 crore, he is liable to pay a surcharge at a rate of 10%. The income tax on Rs 53 lakh income is calculated as per the normal slab rate under the new tax regime, which amounts to Rs 12,75,000. The rate of surcharge that is applicable in this case is 10%, hence the amount of surcharge would be 10% of Rs 12,75,000 which is Rs 1,27,500. Thus, income tax payable (inclusive of surcharge would be Rs 14,02,500 (Rs 12,75,000 + Rs 1,27,500).

When can you get marginal relief on the surcharge?

Those taxpayers have an income above Rs 50 lakh but due to the addition of surcharge, income tax is being applied disproportionately on higher incomes. “The provisions relating to Marginal Relief ensure that the tax liability doesn’t escalate disproportionately due to the surcharge applied on higher incomes,” says Akhil Chandna, Partner, Grant Thornton Bharat, a tax and business consulting group.

Marginal relief can only be taken when your tax payable amount is higher than your marginal gain in income.

For example: Suppose an individual’s net taxable income is Rs 51 lakh. At this income level, a surcharge rate of 10% is to be applied and it comes to Rs 1,34,250. So the total tax including the surcharge would come to Rs 13,42,500. “In this scenario, the surcharge (Rs 1,34,250) surpasses the additional income above Rs 50 lakh (Rs 1,00,000). This is where marginal relief comes into play,” says Soni from Tax2Win.

Which individuals are eligible for marginal relief?

Marginal relief on surcharge must not be confused with marginal relief on income tax which is given to those who have net taxable income slightly more than Rs 7 lakh and chose the new tax regime. In this article, we are talking about marginal relief on surcharge.

“Individual taxpayers with taxable income slightly above Rs 50 lakh/ 1 crore/ 2 crores/ 5 crore are eligible for marginal relief for surcharge amount. Further, marginal relief for income tax amount is also available in case of New Tax Regime if the income is slightly more than Rs 7 lakhs,” says Chandna.

How is marginal relief calculated?

Let’s take another example for individual Mr A, who has a net taxable income of Rs 51 lakh for FY 2023-24. According to Chandna, “The total tax liability is Rs 14,76,750 (under the old tax regime) inclusive of a surcharge of 10%.”

He further explains how marginal relief is calculated:

If the threshold of Rs 50 lakhs to trigger surcharge is not met and Mr A had earned taxable income of Rs 50 lakh, his tax liability would have been Rs 13,12,500 (excluding cess). This will be unfair for the individual to pay an additional income tax of Rs 1,64,250 on incremental income of Rs 1,00,000. The individual’s tax liability should be reduced to avoid any such disproportionate tax payable.

“Hence, by applying the provisions of Marginal relief, Mr A will get a relief of the differential tax amount between the excess tax payable on incremental income i.e. 1,64,250, and the amount of income that exceeds Rs 50 lakh i.e. Rs 1,00,000. The marginal relief would be Rs 64,250 (Rs 1,64,250 – Rs 1,00,000). Hence, the net tax liability on total taxable income of Rs 51 lakh (post marginal relief) would be Rs 14,12,500 (excluding cess),” says Chandna

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