Income Tax: Surcharge and Marginal Relief; Know How to Calculate?:

Income Tax: Surcharge and Marginal Relief; Know How to Calculate?

If your income crosses a certain limit, you might be charged an extra amount, known as a ‘surcharge,’ which increases your overall tax bill. This surcharge is imposed on the taxable income amount before the cess is levied. As per income tax laws, a surcharge is applicable if an individual's taxable income crosses Rs.50 lakh. The government modified the surcharge rates under the new tax regime in FY 2023-24. The following surcharge rates were applicable from April 1, 2023.

Surcharge rates under the new tax regime in FY 2023-24

Income Range	Surcharge Rate
Up to Rs.50 lakh	Nil
More than Rs.50 lakh but up to Rs.1 crore	10%
More than Rs.1 crore but up to Rs.2 crore	15%
More than Rs.2 crore	25%

Individuals selecting the old tax regime in the current financial year, 2024-25, will keep paying the same surcharge rate they were paying in the previous financial year.

Surcharge Rates under the old tax regime in FY 2024-25

Income Range	Surcharge Rate
Up to Rs.50 lakh	Nil
More than Rs.50 lakh but up to Rs.1 crore	10%
More than Rs.1 crore but up to Rs.2 crore	15%
More than Rs.2 crore but up to Rs.5 crore	25%
More than Rs.5 crore	37%

However, there are some exceptions to the surcharge rates mentioned earlier. If someone earns income from selling equity shares (short term or long term), equity mutual funds, or from dividends, the surcharge will not be more than 15%, no matter how much they earn.

Understanding the Importance of Marginal Relief

While learning about surcharge rates, it’s also important to understand 'marginal relief.' Marginal relief applies when the extra tax (surcharge) is higher than the increase in income over a certain limit. Assume you have a net taxable income of Rs.51 lakh. As mentioned earlier, a surcharge of 10% is imposed when the income exceeds Rs.50 lakh. The tax payable on Rs.51 lakh, excluding the surcharge, is Rs.13,42,500. The surcharge amount will become Rs.1,34,250. Here, the additional income of Rs.1,00,000 is less than the surcharge amount imposed in case the income is 51 lakh. This sounds very unfair. That is when marginal relief is applied to make sure taxpayers are not taxed unfairly. Without the marginal relief, someone earning a little more than the limit might face a huge jump in taxes, even though their income didn’t increase much.

How to Calculate Marginal Relief and Surcharge?

1. First, calculate the income tax payable on Rs.50 lakh, i.e., Rs.13,12,500. 2. Now add the additional income (Income above 50 lakh) of Rs. 1,00,000 to the income tax payable amount. The tax payable under marginal relief will be Rs.14,12,500. 3. To calculate the surcharge amount, subtract the normal tax liability before surcharge and cess (Rs.13,42,500) from the tax liability after marginal relief before cess (Rs.14,12,500):

Rs.14,12,500 - Rs.13,42,500 = Rs. 70,000

4. The tax payable amount will be as follows:

Particulars	Amount (Rs)
Tax Payable Amount	13,42,500
Add: Surcharge	70,000
Add: Cess (4% on Rs 14,12,500)	56,500
Total Tax Payable	14,69,000