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What is Income Tax Surcharge and Marginal Relief?

What is Income Tax Surcharge and Marginal Relief?

Income Tax in India
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Does your income come under one of the higher tax brackets? If that is the case, you are liable to pay a surcharge on your Income Tax. In simpler terms, a surcharge on income tax is an additional tax to be paid by the taxpayers earning a higher income, beyond a certain limit set by the government. This is done by the government to ensure that the rich contribute to the income taxes more than the poor, owing to the surcharge provision. But to ensure balance, a marginal relief is also provided to the taxpayers on the surcharge.

What is Surcharge?

A surcharge is an extra fee, tax or fee added to the cost of a good or service in addition to the initial price. A surcharge is added to the existing tax and is not a part of the initially quoted price of a good or service.

What is Surcharge on Income Tax?

Income tax surcharge is an additional charge that you need to pay on income tax. Surcharge on income tax is levied if Income is more than Rs. 50 Lakhs in case of Individuals and Rs. 1 Crores in case of Companies.

In the Income Tax Act, there is a provision of a surcharge on income tax for those taxpayers whose income falls under the upper tax slab of 30%. You are liable to pay an additional surcharge on your Income Tax liability if your income falls under the 30% tax slab.

Surcharge Rates Applicable to Different Taxpayers

The rate of the surcharge for individuals is different from those of other taxpayers. Here is a table showing the rates of surcharge on income tax for various types of taxpayers:

Type of Taxpayer Income Limit Surcharge Rate on Income Tax
Individual/HUF/AOP/BOI/ Artificial Judicial Person Less than Rs 50 Lakhs Nil
Individual/HUF/AOP/BOI/ Artificial Judicial Person Rs.50 Lakhs to Rs. 1 Crore 10%
Individual/HUF/AOP/BOI/ Artificial Judicial Person Rs.1 Crore to Rs 2 crore 15%
Individual/HUF/AOP/BOI/ Artificial Judicial Person Rs.2 Crore to Rs 5 crore 25%*
Individual/HUF/AOP/BOI/ Artificial Judicial Person More than Rs.5 Crore 37%*
Firm/LLP/Local authorities/Co-operative Society More than Rs.1 Crore 12%
Domestic Company Rs.1 Crore to Rs.10 Crore 7%
Domestic Company More than Rs.10 Crores 12%
Foreign Company Rs.1 Crore to Rs. 10 Crore 2%
Foreign Company More than Rs.10 Crore 5%

Here, it is important to note that if your income is more than Rs.1 crore but less than Rs. 2 crores, the surcharge on income tax will be levied at the rate of 15%.

As per the provisions of the Income Tax Act, you can get a marginal relief, if your income is above Rs.50 lakhs. The Marginal relief will be the difference between the excess tax payable (including the surcharge for individuals) and the amount exceeding Rs.50 Lakhs.

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Marginal Relief for Individuals

Marginal relief limits your income tax liability to 40% of the difference between your total income and your tax exemption limit. You cannot receive any further credits on income after marginal relief is provided.

According to the surcharge provisions made under the Income-tax Act, a marginal relief shall be provided to certain taxpayers, which is equal to the amount of the difference between the tax payable (including surcharge) on the income above the set limit (50 Lakhs or 1 Crore) and the amount of income that exceeds the set limit (50 Lakhs or 1 Crore).

Marginal relief limits your income tax liability to 40% of the difference between your total income and your tax exemption limit. You cannot receive any further credits on income after marginal relief is provided.

Let’s take an Example: Say Raj earns a total income (net income after all possible deductions or the taxable income) of Rs.51 Lakhs in a financial year, which is more than the 50 Lakhs limit but does not exceed Rs.1 Crore. Therefore, Raj will have to pay a surcharge on the income tax computed at the rate of 10%.

Therefore, the total tax payable will be Rs. 14,76,750. But, if Raj would have earned only Rs.50 lakhs, then he would have to pay only Rs.13,12,500, which means earning an extra 1 Lakh gets him to pay extra income tax of Rs.1,64,250.

Fortunately, Raj gets a marginal relief of the difference amount between the excess tax payable, that is Rs.1,64,250 (Rs.14,76, 750 – Rs.13,12,500 ) and the amount of income that exceeds Rs. 50 Lakhs, that is 1 Lakh (Rs.51,00,000 – Rs.50,00,000). The marginal relief that Raj receives will be Rs.64,250 (Rs.1,64,250 – Rs.1,00,000).

Marginal Relief for Firms

In the case of a firm, if the total income of the firm exceeds Rs. 1 crore, a surcharge is levied at a 12% rate. In such a case, the Marginal relief will be the difference of the income tax payable (including surcharge) and the amount exceeding Rs. 1 crore.

1. For instance, if you are running a firm whose total income is Rs. 1.01 crores, you will have to pay an income tax including the surcharge on income tax at 12%. Hence, the total tax payable will be Rs. 32.24 lakhs.

2. however, if your firm’s total income would have been Rs. 1 crore, your tax payable would have been only Rs. 31.2 lakhs only. That means that you are paying an extra income tax of Rs. 1.04 lakhs for earning an extra income of Rs. 1 lakh.

3. Hence, your firm can avail a marginal relief which is the difference between the excess tax payable on higher income, i.e., Rs. 1.04 lakhs, and the amount exceeding Rs. 1 crore, i.e., Rs. 1 lakh in this case.

4. Accordingly, your marginal relief comes out to be (1,04,000 — 1,00,000) = Rs.4,000.

Marginal Relief for Domestic Companies

If you are operating a domestic company whose turnover is between Rs. 1 crore to Rs. 10 crore, you will have to pay a surcharge on the income tax of 7%.

Marginal relief will be provided to such a company whose total income is between Rs.1 crore to Rs. 10 crores. The relief will be the difference of the amount of income tax payable (including surcharge) on the higher income and the amount exceeding Rs.1 crore.

Here is a case study to help you understand better:

1. For instance, if your company’s total income is Rs.1.01 crores, you will have to pay an income tax including the surcharge on income tax at 7%. Hence, the total tax liability will be Rs. 27.04 lakhs. (After claiming 87A rebate and including Health & education cess)

2. However, if your firm’s total income would have been Rs. 1 crore, your tax payable would have been only Rs. 26 lakhs only. That means that you are paying an extra income tax of Rs. 1.04 lakhs for earning an extra income of Rs. 1 lakh.

3. Hence, your firm can avail a marginal relief which is the difference between the excess tax payable on higher income, i.e., (Rs. 1.04 lakhs), and the amount exceeding Rs. 1 crore (Rs. 1 lakh in this case).

4. Accordingly, your marginal relief comes out to be (1,04,000 - 1,00,000) = Rs. 4,000

From the above 2 case studies, you can now understand how the marginal relief on the surcharge on income tax works in the case of firms and domestic companies.

How can you Save Tax?

You can reduce your tax liabilities by using the following strategies:

1. Buy a Life Insurance Plan

You can claim deduction up to 1.5 Lakhs from your taxable income on the premiums paid towards a life insurance policy for yourself, your spouse or children.

2. Get a Health Insurance Plan

A health insurance gets you a tax exemption of up to Rs.25,000 under Section 80D of the Income Tax Act. An additional benefit of Rs.25,000 can be claimed for health insurance of parents, and up to Rs.50000 in case of premiums paid for parents who are senior citizens.

3. Invest in National Pension Scheme

By investing in NPS, not only will you be building a healthy retirement corpus but you will also save on taxes as it qualifies for up to Rs 50,000 deductions under the Section 80CCD of the Income Tax Act, 1961.

4. Donate in Charity

Most donations to charitable institutions are deductible under Section 80G of the Income Tax Act.

Therefore, conclusively, a surcharge will be applicable for individuals if their net total income (after all possible deductions or the taxable income) exceeds 50 Lakhs. However, a marginal relief can be claimed by all persons for whom surcharge is applicable.

Speak to an insurance specialist now!

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