Reduced effective tax rate of 39% in top tax bracket of new tax regime, as opposed to 42.74%; here’s how marginal relief works

A ‘surcharge’ is an extra tax that individuals with incomes exceeding Rs.50 lakh are required to pay.

On the other hand, the surcharge rates are set according to certain income bands. The highest surcharge rate for persons earning over Rs.5 crore was lowered from 37% to 25% in Budget 2023, provided that these individuals choose the new tax regime.

According to Tax Expert, “People with higher incomes are subject to a surcharge, which is an additional fee on top of taxes.” It’s important to remember that, as of April 1, 2023, the highest surcharge rate of 37% was lowered to 25% under the revised tax structure in Budget 2023. The effective tax rate was reduced by this action from 42.74% to 39%.”

What are the surcharge slabs?

Both the old and new tax regimes have the following structure for their surcharge rates:

How do you compute and impose the surcharge?

Let us understand this with an example.

Example: Let’s say a salaried person’s taxable income is Rs. 53 lakh. In this instance, the individual is subject to a 10% surcharge since his taxable income exceeds Rs.50 lakh but falls short of Rs.1 crore. Under the new tax system, income tax on income up to Rs. 53 lakh is computed using the standard slab rate of Rs.12,75,000 as a basis.

Since there is a 10% surcharge in this instance, the amount of the surcharge would be 10% of Rs.12,75,000, or Rs.1,27,500. As a result, the amount of income tax due, including the surcharge, would be Rs.14,02,500 (Rs.12,75,000 + Rs.1,27,500).

When can you get marginal relief on the surcharge?

These people make more than Rs. 50 lakh annually, but because of the surcharge, income tax is now levied unfairly to those with greater incomes.

The Marginal Relief rules make sure that the surcharge on higher incomes doesn’t cause the tax liability to increase disproportionately.

Only when your tax liability exceeds your marginal income gain may you claim marginal relief.

Let’s take an example where a person’s net taxable income is Rs 51 lakh. 10% of this income level, or Rs 1,34,250, is the surcharge rate that must be applied. Therefore, the entire tax, including the surcharge, would be Rs 13,42,500.

The surcharge (Rs 1,34,250) in this case is greater than the extra revenue over Rs 50 lakh (Rs 1,00,000). This is the situation where marginal relief is useful.

Which individuals qualify for marginal relief?

It is important to distinguish between marginal relief on surcharge and marginal relief on income tax, which is granted to people who choose the new tax regime and have net taxable income that is only marginally more than Rs 7 lakh.

It is crucial to understand the difference between marginal relief on income tax and surcharge. The latter is provided to those who opt for the new tax regime and have net taxable income that is only slightly higher than Rs 7 lakh.

How we can calculate marginal relief?

Let’s look at another example using individual Mr. A, whose net taxable income for FY 2023–2024 is Rs 51 lakh. With a 10% surcharge, the total tax burden under the old tax regime was Rs. 4,76,750.

Calculation of Marginal Relief:

Had Mr. A’s taxable income exceeded the Rs. 50 lakh threshold that would have resulted in a surcharge, his tax obligation would have been Rs. 13,12,500 (excluding cess). It will be unjust for the person to pay an extra Rs. 1,64,250 in income tax on an additional Rs.1,000,000 in income. Reduced tax obligations for the individual are necessary to prevent any such disproportionate taxes from being due.

Therefore, Mr. A will receive relief from the differential tax amount between the excess tax owed on incremental income, or Rs. 1,64,250, and the amount of income that exceeds Rs. 50 lakh, or Rs. 1,00,000, by applying the terms of marginal relief. The difference between Rs 64,250 and Rs 1,00,000 would be the marginal alleviation. Therefore, after marginal reduction, the net tax payment on the total taxable income of Rs 51 lakh would be Rs 14,12,500 (without cess).