What is Income Tax Surcharge?

In Budget 2013, then Finance Minister P. Chidambaram introduced the concept of income tax surcharge. Since then, it has become a permanent tax provision. The concept of income tax surcharge means an additional tax that high-income taxpayers should pay on the income tax.

The surcharge rate and income limits vary for different types of taxpayers, like an Individual, Company, Firm, Co-Operative Society, AJP (Artificial Judicial Person), HUF (Hindu Undivided Families), AOP (Associate of Persons), BOI (Body of Individuals), etc. Take a look at the rate of surcharge for AY 2023-24-

*- Surcharge of 37% shall be limited to 25% if the taxpayer has opted for New tax regime

Also Read What is Income Tax Return(ITR)?

What are the Provisions of Income Tax Surcharge?

There are certain provisions based on which the tax surcharge is implemented. Take a look-

● The tax surcharge on the income generated from Section 111A (Capital Gain), Section 112A (Capital Gain), and Dividend Income added to the NTI (Net Taxable Income) cannot be over 15%.
● If the assessee falls in the surcharge rate bracket of 25% or 37% due to the addition of income from Section 111A (Capital Gain), Section 112A (Capital Gain), and Dividends, they don’t have to pay the surcharge at 25% or 37% respectively.

For instance, if the NTI is ₹2.5 crore but it includes Section 111A/112A/Dividend Income ₹60 lakhs, the remaining income is only ₹1.9 crore and is not higher than ₹2 crore. So, the surcharge rate will not be 25%. The income from Section 111A/112A/Dividend (₹60 lakhs) and the remaining income (₹1.9 crore) will attract a surcharge of 15%.

What is Marginal Relief?

The tax surcharge laws also have a marginal relief provision. It is available to assessees when the additional tax payable on the additional income above the prescribed limits for the surcharge is higher than the additional income itself.

With the help of marginal relief, taxpayers from the higher income group of ₹50 lakhs and above can limit their tax liabilities.

How is Marginal Relief Calculated?

Let’s try to understand marginal relief calculation with the help of an example-

Mr Rahul, 48, is an individual taxpayer with an NTI of ₹51 lakhs for the assessment year 2023-24. So, according to the tax surcharge rule, he is liable to pay a surcharge at 10% as his income falls between ₹50 lakhs and ₹1 crore. Here's how it'll be calculated-

So, while the additional income above ₹50 lakhs is ₹1 lakh, the additional tax is ₹164,250. As the additional tax is higher than the additional income, Mr Rahul will be eligible for marginal relief.

Marginal relief is only available on surcharge and not on cess. It shall be calculated as the difference amount between excess tax payable on higher income due to applicability of higher surcharge.

Understanding Income Tax Surcharge and Marginal Relief

The Indian tax structure is such that high-income taxpayers pay more taxes and contribute more to the country's growth. But while the surcharge increases their tax liabilities, they can claim marginal relief in some cases to reduce their taxes.

As the surcharge and marginal relief provisions are complex, it’d be wise to consult a tax advisor to accurately calculate your tax liabilities.

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