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What is Income Tax Surcharge?

What is Income Tax Surcharge?

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. Read on to find out –

Understanding Surcharge on Income Tax

Income tax surcharge is an extra tax on the taxpayers who have a higher income inflow during a particular financial year. There are different surcharge rates applicable on different taxpayers, as per the Income Tax Act, 1961.

Surcharge rates for Individuals/HUFs/AOPs/BOIs/ Artificial Judicial Persons basis their income limits:

Income limit Surcharge rate on the amount of income tax
More than Rs.50 Lakhs but Less than Rs.1 Crore 10%
More than Rs.1 Crore but Less than Rs.2 Crore 15%
More than Rs.2 Crore but Less than Rs.5 Crore 25%
More than Rs.5 Crore 37%

Understanding Marginal Relief for Individuals

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).

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).

How can you save tax?

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

Buy a life insurance: 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.

Get a health insurance: 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.

Invest in Public Provident Fund: The interest earned on PPF is tax-free.

Contribute to 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 80 CCD of the Income Tax Act, 1961.

Donate in charity: Most donations to charitable institutions are deductible under Section 80 G 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.

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