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September 19, 2020

Understanding Surcharge and Marginal Relief under Income Tax

by CA Shivam Jaiswal in Income Tax

Understanding Surcharge and Marginal Relief under Income Tax

India offers a well-structured tax system for its population. Taxes are the largest source of income for the government. This money is deployed for various purposes and projects for the development of the nation. As per the Income Tax Act, 1961 every assessee whose total income exceeds the maximum exempt limit is liable to pay income tax.

The tax structure and rates are annually prescribed by the Union Budget. The total income is calculated from various heads such as business and profession, house property, salaries, capital gains, and other sources. The assesses are classified as individuals, Hindu Undivided Family (HUF), association of persons (AOP), body of individuals (BOI), company, firm, local authority, and artificial judiciary not falling in any other category.

What do you mean by surcharge under Income Tax?

In certain cases, where the level of income goes beyond the certain limit, the government imposes additional taxes on rich persons in addition to income tax already imposed and this additional tax is called ‘Surcharge’.

A surcharge or additional charge is essentially a tax levied on a tax. It is calculated on payable tax, not on income generated. For instance, a surcharge of 10% on an existing tax rate of 30% effectively raises the total tax rate to 33%. If a tax is imposed at 30% on an income of Rs 100, the total payable tax would be Rs 30. Then, a surcharge of 10% calculated on Rs 30 would amount to Rs 3. So, the effective payment would be Rs 30 + Rs 3 = Rs 33.

What is the rate of surcharge under Income Tax for FY 2020-21?

For Individual/HUF/AOP/BOI/ Artificial Judicial Person

Range of IncomeSurcharge (%)
Rs. 50 Lakhs to Rs. 1 crore                          10%
Rs. 1 Crore to Rs. 2 Crores15%
Rs. 2 Crores to Rs. 5 Crores25%
Exceeding Rs. 5 crores37%

For Firm/LLP/Local authorities/Co-operative Society – Surcharge of 12% will be applicable when net income exceeds Rs 1 crore

For Domestic Company

Range of IncomeSurcharge (%)
Rs. 1 crore to Rs 10 crore7%
Exceeding Rs. 10 Crore12%

For Foreign Company

Range of IncomeSurcharge (%)
Rs. 1 crore to Rs 10 crore2%
Exceeding Rs. 10 Crore5%

The enhanced surcharge of 25% & 37%, as the case may be, is not levied, from income chargeable to tax under sections 111A, 112A and 115AD. Hence, the maximum rate of surcharge on tax payable on such incomes shall be 15%. Health and Education cess at the rate of 4% will be added to the income tax liability in all cases.

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What do you mean by Marginal Relief?

According to the Income-tax Act, 1961, a marginal relief is given to individuals whose taxable income is beyond the threshold limit after which surcharge is payable, but the net income above the threshold is less than the surcharge.

Marginal relief is available from surcharge For Individual/HUF/AOP/BOI/ Artificial Judicial Person in following manner:

  • in case where net income exceeds Rs. 50 lakh but doesn’t exceed Rs. 1 Crore, the amount payable as income tax and surcharge shall not exceed the total amount payable as income tax on total income of Rs 50 Lakh by more than the amount of income that exceeds Rs 50 Lakhs
  • in case where net income exceeds Rs. 1 crore but doesn’t exceed Rs. 2 crore, marginal relief shall be available from surcharge in such a manner that the amount payable as income tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore.
  • in case where net income exceeds Rs. 2 crore but doesn’t exceed Rs. 5 crore, marginal relief shall be available from surcharge in such a manner that the amount payable as income tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 2 crore by more than the amount of income that exceeds Rs. 2 crore.
  • in case where net income exceeds Rs. 5 crore, marginal relief shall be available from surcharge in such a manner that the amount payable as income tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 5 crore by more than the amount of income that exceeds Rs. 5 crore

Marginal Relief for Firms/LLP/Local authorities/Co-operative Society is available in the following manner:

A marginal relief will be provided to such taxpayers having a total income of more than Rs.1 crore i.e., the income tax payable (including surcharge) on the higher income should not exceed the income tax payable on Rs.1 Crore by more than the amount of income that exceeds Rs.1 crore.

Marginal Relief for Companies (domestic and foreign) is available in the following manner:

  • Marginal relief will be provided to companies having a total income of more than Rs.1 crore but less than Rs.10 crores i.e., the income tax payable (including surcharge) on the higher income should not exceed the income tax payable on Rs.1 Crore by more than the amount of income that exceeds Rs.1 crore.
  • Marginal relief will be provided to companies having a total income of more than Rs.10 crores i.e., the income tax payable (including surcharge) on the higher income should not exceed the income tax payable on Rs.10 crores by more than the amount of income that exceeds Rs.10 crores.

Arithmetically, one can calculate the marginal relief in the following manner

Step 1: Calculate the surcharge on the tax amount. 

Step 2: Calculate the excess income over Rs. 1 crore (the specified limit over which surcharge applies)

Step 3: Multiply the amount determined in step 2 with 0.70 (which is the after-tax rate, where the tax rate is 30%)

Step 4: Marginal Relief is the difference between the amount determined in step 1 and step 3.

Let us refer to the following instances to understand surcharge and marginal relief better

Example 1

Mr X, an individual has a total income of Rs.51 Lakhs in an FY, he will have to pay taxes inclusive of a surcharge of 10% on the tax computed i.e., total tax payable will be Rs. 14,76,750 (tax as per slabs + 10% surcharge). However, if he would have earned only Rs.50 lakhs, then the tax liability would have been Rs.13,12,500 only (tax as per slabs)

This is an unfair position for the individual. For earning an extra Rs.1,00,000, he will end up paying income tax of Rs.1,64,250. The individual’s tax liability should be reduced to avoid any such excess tax payable.

The individual will get a marginal relief of the difference amount between the excess tax payable on higher income i.e (Rs.14,76,750 – Rs.13,12,500 = Rs.1,64,250 ) and the amount of income that exceeds Rs. 50 Lakhs i.e. (Rs.51,00,000 – Rs.50,00,000 = Rs.1,00,000). The marginal relief will be Rs.64,250 (Rs.1,64,250 minus Rs.1,00,000).

Example 2

If the total income of Mr Y, an individual is Rs.1.01 crore, he will have to pay tax inclusive of a surcharge of 15% on the tax computed i.e., total tax payable will be Rs.32,68,875 (tax as per slabs + 15% surcharge). But, if he would have earned only Rs.1 crore, then the tax payable would have been Rs.30,93,750 only (tax as per slabs + 10% surcharge). For earning an extra Rs.1,00,000, he ended up paying income tax of Rs.1,75,125.

Hence, the individual will get a marginal relief of the difference amount between the excess tax payable on higher income i.e (Rs.1,75,125) and the amount of income that exceeds Rs.1 crore i.e. (Rs. 1,00,000, in this case). The marginal relief will be Rs.75,125 (Rs.1,75,125 – Rs.1,00,000).

Example 3

If the total income of a firm (ABC and associates) is Rs.1.01 crores, it will have to pay an income tax inclusive of a surcharge of 12% on the tax computed i.e., total tax payable will be Rs.33,93,600 (tax @30% + 12%surcharge). But if the total income would have been only Rs. 1 crore, then the tax payable would have been Rs.30,00,000 (tax @30%) only.

For earning an extra Rs.1,00,000, it will end up paying income tax of Rs.3,93,600 (33,93,600 – 30,00,000)

Hence, the firm will get a marginal relief of the difference amount between the excess tax payable on higher income i.e (Rs.3,93,600) and the amount of income that exceeds Rs.1 crore i.e. (Rs.1,00,000, in this case). The marginal relief will be Rs. 2,93,600 (Rs. 3,93,600 – Rs.1,00,000).

Hence, the concept of Marginal Relief deals with the major idea and intent that the increase in Income Tax should not become more than the amount increased in the income of a taxpayer. By the effect of marginal relief, the Income Tax liability of a taxpayer tends to reduce. Be it individuals, HUFs, firms, domestic or foreign companies the provision of marginal relief is beneficial for all.

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