Income Tax Surcharge and Marginal Relief

What is Surcharge on Income Tax? How to Calculate Your Marginal Relief? Income tax act, paying tax is a responsibility of individuals as well as businesses with an income being generated. If your net income is less than 2.5 Lakhs, you do not have to pay tax, but if the income is more than that it is important to pay income tax.

If you fall in the higher income category, the income department levies an additional charge known as surcharge rate.

If the net taxable income for any individual is more than 50 Lakhs, they fall under higher income category and surcharge shall be levied. However, the government also provides a marginal relief for any individual, firm or company paying a surcharge. To understand what income tax surcharge rate is and how to calculate marginal relief, read the blog thoroughly.

What is the Income Tax Surcharge Rate?

A surcharge refers to an additional charge imposed by the Income Tax Department on any individual, firm or company that falls under the high net income category. The surcharge rate was initiated with the purpose of equality and transparency. It is designed to ensure that high-income earners contribute more to the nation’s revenue.

Current Surcharge Rates for Taxpayers

Let’s have a look at all the three entities and understand the surcharge slabs

For Individuals:

IncomeSurcharge on Income Tax (Old Regime)Surcharge on Income Tax (New Regime)
Exceeding 50 Lakhs and Up to 1 Crore	10%	10%
Exceeding 1 Crore and Up to 2 Crore	15%	15%
Exceeding 2 Crore Up to 5 Crore	25%	25%
Exceeding 5 Crore	37%	25%

Note- If for any individual the income comes from Section 111A (short term capital gain), 112A (long term capital gain) or from dividend income, the maximum surcharge stands 15% for those individuals.

Firms (Partnership/ LLP)

Income	Surcharge on Income Tax (Old Regime)	Surcharge on Income Tax (New Regime)
Exceeding 1 Crore	12%	12%

Companies: Domestic and International

EntityIncomeSurcharge on Income Tax
Domestic company	Exceeding 1 Crore Up to 10 Crore	7%
Domestic company	Exceeding 10 Crores	12%
International company	Exceeding 1 Crore Up to 10 Crore	2%
International company	Exceeding 10 Crore	5%

What is Marginal Relief in Income Tax?

Marginal relief is a provision under the Income Tax Law that provides relief to entities whose income just exceeds the threshold limit. In simple terms, if the income of any individual has slightly exceeded,they will have a marginal relief to avoid any disproportionality between the regular high income slab individual and any individual whose income has slightly exceeded his slab. It prevents the individual from stepping into a higher surcharge bracket on a slight increase of the income. It reduces the tax burden and maintains fairness and transparency.

How to Calculate Your Marginal Relief with Example

To calculate your marginal relief

1. Compute the base income tax based on the applicable slab rates.
2. Add the surcharge based on your income level.
3. Compare the total tax liability with and without the surcharge.
4. Determine the marginal relief by ensuring the incremental tax is not greater than the incremental income.

Example 1: An individual with an income of Rs. 1.1 crore

1. Base tax: Rs. 14,62,500
2. Surcharge (15%): Rs. 2,19,375
3. Total tax: Rs. 16,81,875
4. Without surcharge: Tax on Rs. 1 crore + tax on Rs. 10 lakh (without exceeding the threshold): Rs. 15,62,500
5. Marginal relief: Rs. 16,81,875 – Rs. 15,62,500 = Rs. 1,19,375 (if incremental tax is more than incremental income)

Example 2: A domestic company with an income of Rs. 12 crore

1. Base tax: Rs. 3,36,00,000
2. Surcharge (12%): Rs. 40,32,000
3. Total tax: Rs. 3,76,32,000
4. Without surcharge: Tax on Rs. 10 crore + tax on Rs. 2 crore (without exceeding the threshold): Rs. 3,36,00,000
5. Marginal relief: Rs. 3,76,32,000 – Rs. 3,36,00,000 = Rs. 40,32,000 (if incremental tax is more than incremental income)

Note: Calculate your taxes here

If you are a part of a high income category and are an entity that is responsible for applying surcharge, it is important to understand what is surcharge on income tax and add the right percentage according to your slab. The government and income tax department introduced marginal relief to give a privilege to entities and prevent them from paying hefty additional charges only because of minimal increase in income.