Understanding Income Tax Surcharge in India
Individuals falling under the higher income tax brackets in India, particularly those facing a 30% income tax rate, could be subject to additional surcharge on their tax liability. This additional charge is designed to require higher income earners to contribute more to taxes than those with lower incomes. The government implements provisions for a marginal relief on surcharge for certain classes of taxpayers, aiming to offer some relief to individuals facing higher tax burdens.
Key Updates from Budget 2023
- The Finance Minister has proposed a reduction in the highest surcharge rate on income exceeding 5 crores from 37% to 25%. This change will result in a decrease in the Maximum Marginal Tax rate from 42.74% to 39% and will be effective under the new tax regime starting from April 1, 2023.
- Additionally, a tax rebate is introduced on income up to 7 lakhs under the new tax regime, signifying zero tax liability for individuals with income below Rs. 7 lakhs.
Budget 2022 Highlights
- The surcharge on long-term capital gains (LTCG) from listed equity shares and units is capped at 15%.
Understanding Income Tax Surcharge
Income tax surcharge represents an extra charge payable on income tax, particularly affecting taxpayers with significant income during a specific financial year.
Current Surcharge Rates for Different Taxpayers (Effective from April 1, 2023)
The highest surcharge rate of 37% will be reduced to 25% under the new tax regime. Below are the surcharge rates applicable for Individual/HUF/AOP/BOI/Artificial Judicial Person:
- Net Taxable Income limit
- Surcharge Rate on the amount of income tax under the old tax regime
- Surcharge Rate on the amount of income tax under the new tax regime
- Less than Rs 50 lakhs: Nil, Nil
- More than Rs 50 lakhs and ≤ Rs 1 Crore: 10%, 10%
- More than Rs 1 Crore and ≤ Rs 2 Crore: 15%, 15%
- More than Rs 2 Crore and ≤ Rs 5 Crore: 25%, 25%
- More than Rs 5 Crore: 37%, 25%
| Net Taxable Income limit | Surcharge Rate on the amount of income taxunder old tax regime | Surcharge Rate on the amount of income taxunder new tax regime |
| Less than Rs 50 lakhs | Nil | Nil |
| More than Rs 50 lakhs ≤ Rs 1 Crore | 10% | 10% |
| More than Rs 1 Crore ≤ Rs 2 Crore | 15% | 15% |
| More than Rs 2 Crore ≤ Rs 5 Crore | 25% | 25% |
| More than Rs 5 Crore | 37% | 25% |
Notable Changes from Budget 2023
Under the new tax regime, the highest surcharge is reduced to 25% effective from April 1, 2023. Moreover, the surcharge for AOPs having only companies as members is set at 15%, applicable to AOPs with total income exceeding Rs 2 crores.
Surcharge Rates for Domestic Company
- For a taxable income of less than Rs.1 crore, the surcharge rate under the normal provisions is -, while for income exceeding Rs 1 Crore and ≤ 10 Crore, it’s 7%.
| Net Taxable Income limit | Surcharge Rate on the amount of income tax under normal provisions | Surcharge Rate on the amount of income tax us 115BAA or 115BAB |
| Less than Rs.1 Crores | – | 10%* |
| More than Rs 1 Crore ≤ Rs 10 Crore | 7% | |
| More than Rs.10 Crores | 12% |
Surcharge Rates for Foreign Company
- For a taxable income of more than Rs 1 Crore and ≤ 10 Crore, the surcharge rate is 2%, and for income exceeding Rs. 10 Crores, it’s 5%.
| Net Taxable Income limit | Surcharge Rate on the amount of income tax |
| More than Rs 1 Crore ≤ Rs 10 Crore | 2% |
| More than Rs.10 Crores | 5% |
Marginal Relief for Individuals
In the case where the total income is more than Rs. 50 Lakhs but doesn’t exceed Rs. 1 Crore, taxpayers will have to pay a 10% surcharge on the computed income tax. Individuals meeting certain criteria will be provided with marginal relief to alleviate excessive tax burdens on higher incomes.
Effects on Tax Regime
Notably, in the new tax regime, surcharge rates remain constant, while the income tax slab undergoes the following changes:
- First 3,00,000: Nil
- Next 3,00,001 – 6,00,000: @5%
- Next 6,00,001 – 9,00,000: @10%
- Next 9,00,001 – 12,00,000: @15%
- Next 12,00,001 – 15,00,000: @20%
- More than 15,00,000: @30%
Where the total income is more than Rs.1 crore, a surcharge of 12% will be levied on the income tax payable. 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. To simplify, if the total income of a firm 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.32,24,000. But, if the total income would have been only Rs. 1 crore, then the tax payable would have been Rs.31,20,000 only. For earning an extra Rs.1,00,000, it will end up paying income tax of Rs.1,04,000.
Hence, the firm will get a marginal relief of the difference amount between the excess tax payable on higher income i.e. (Rs.1,04,000) 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.4,000 (Rs.1,04,000 minus Rs.1,00,000).
Marginal relief for companies
Case 1: Where the total income of a domestic company is more than Rs.1 crore but does not exceed Rs.10 crore, a surcharge of 7% will be levied on the income tax payable.
Similarly, for foreign companies having total income more than Rs.1 crore but less than Rs. 10 crores, a surcharge of 2% will be levied on the income tax payable.
Marginal relief will only be provided to such 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.
Case 2: Where the total income of a domestic company is more than Rs.10 crores, a surcharge of 12% will be levied on the income tax payable.
Similarly, for foreign companies having total income more than Rs.10 crores, a surcharge of 5% will be levied on the income tax payable.
Marginal relief will only be provided to such 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.