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What is Income Tax Surcharge and Marginal Relief?

Marginal Relief ensures a more equitable taxation system, empowering taxpayers to navigate their financial strategies effectively.

In the intricate taxation landscape, terms like "Income Tax Surcharge" and "Marginal Relief" often emerge as enigmatic entities, leaving many baffled. We understand the significance of unravelling these concepts for a clearer financial understanding. 
 

In this comprehensive blog, you will embark on a journey to demystify Income Tax Surcharge and Marginal Relief. You will learn about their purpose, calculation, and impact on individuals and businesses. 
 

Whether you're a seasoned taxpayer or just beginning your financial journey, this blog aims to equip you with the knowledge needed to navigate this crucial aspect of the tax realm. 
 

So, let's dive in!

What is an Income Tax Surcharge?

A surcharge on income tax for individuals is an additional levy imposed by a government on top of regular taxes. It is typically applied in specific situations, such as high-income brackets or extraordinary circumstances. The purpose of a surcharge varies, often aiming to fund specific programs or address budgetary shortfalls. 
 

In income tax, a surcharge is levied on taxpayers with incomes surpassing a predetermined threshold. This mechanism allows governments to ensure that higher-earning individuals contribute proportionally more to public revenue. 
 

Surcharges serve as a tool for fiscal policy, enabling authorities to target particular segments of the population or sectors for additional financial support.

Applicability of Surcharge Rates for Different Taxpayers

The surcharge rates vary between individuals and other taxpayer categories. Refer to the table below for the applicable current surcharge on income tax based on taxpayer types:
 

Taxpayer Types

Income Limit

Surcharge on Income Tax

Individual/HUF/AOP/BOI/ Artificial Judicial Person

Less than ₹50 Lakhs

Nil

Individual/HUF/AOP/BOI/ Artificial Judicial Person

₹50 Lakhs to ₹1 Crore

10%

Individual/HUF/AOP/BOI/ Artificial Judicial Person

₹1 Crore to ₹2 crores

15%

Individual/HUF/AOP/BOI/ Artificial Judicial Person

₹2 Crores to ₹5 crores

25%

Individual/HUF/AOP/BOI/ Artificial Judicial Person

More than ₹5 Crores

37%

Firm/LLP/Local authorities/Co-operative Society

More than ₹1 Crore

12%

Domestic Organisations 

₹1 Crore to ₹10 Crore

7%

Domestic Organisations

More than ₹10 Crores

12%

Foreign Organisations

₹1 Crore to ₹10 Crore

2%

Foreign Organisations

More than ₹10 Crore

5%

 

It's crucial to understand that if your income falls between ₹1 crore and ₹2 crores, a 15% surcharge on income tax will apply. 
 

Additionally, under the Income Tax Act provisions, you're eligible for marginal relief if your income exceeds ₹50 lakhs. Marginal relief is calculated as the disparity between the excess tax liability (inclusive of the individual surcharge) and the amount surpassing ₹50 lakhs.

Budget 2023 Update for Surcharge on Income Tax Calculation

 

 

In the latest Budget 2023 amendment, the top surcharge rate slashed from 37% to 25%, effective from 1st April 2023 for the fiscal year 2023-24. 
 

Noteworthy changes include a reduced surcharge to 15% for Association of Persons (AOPs) exclusively comprising companies, applicable if their total income surpasses ₹2 crores.
 

Furthermore, a ceiling of 15% has been imposed on the surcharge for long-term capital gains (LTCG) from listed equity shares, units, and similar assets. 
 

These revisions signify a significant shift in the tax landscape, offering new opportunities for various taxpayer categories.

Income Tax Marginal Relief for Individuals – With Example!

Marginal Relief is a provision within the Indian Income Tax Act designed to alleviate the tax burden on individuals whose income falls within a specific range, particularly those earning above Rs. 50 lakhs. It ensures that the tax liability doesn't escalate disproportionately due to the surcharge applied on higher incomes.
 

Here's how it works:
 

Suppose an individual's taxable income exceeds ₹50 lakhs, and after factoring in the regular tax and surcharge, they find themselves in a situation where the surcharge pushes their effective tax rate significantly higher. In such cases, Marginal Relief steps in to bridge this gap.
 

For instance, let's say an individual earns ₹60 lakhs in a given financial year. Under normal circumstances, the surcharge might lead to an exorbitant tax liability. However, with Marginal Relief, the excess tax burden is calculated on the income surpassing ₹50 lakhs.
 

Assuming a simplified tax rate of 30% for incomes above ₹50 lakhs, the tax liability on ₹60 lakhs without considering Marginal Relief would be ₹6 lakhs. With Marginal Relief, the excess tax is calculated on the additional ₹10 lakhs (₹60 lakhs - ₹50 lakhs), amounting to ₹3 lakhs (30% of ₹10 lakhs).
 

Marginal Relief ensures that the total tax liability is ₹6 lakhs (tax on ₹50 lakhs) plus ₹3 lakhs (excess tax on ₹10 lakhs), totalling ₹9 lakhs. Without Marginal Relief, the tax liability would have been ₹11 lakhs (tax on ₹60 lakhs). This provision thus prevents an undue surge in tax liability for individuals in this income bracket.

Income Tax Marginal Relief for Firms – With Example!

Marginal Relief also applies to firms, specifically to the Association of Persons (AOPs), that solely comprise companies as their members and have a total income exceeding ₹2 crores. This provision aims to prevent an excessive tax burden that may arise due to the surcharge on higher incomes.
 

Let's illustrate how Marginal Relief operates for such organisations:
 

Consider an AOP consisting exclusively of companies with a total income of ₹2.5 crores for a given financial year. Without Marginal Relief, the surcharge of 15% would lead to a substantial increase in their tax liability.
 

In this scenario, the surcharge would be calculated on the excess income above ₹2 crores, which is ₹50 lakhs. At a 15% surcharge rate, this amounts to ₹7.5 lakhs (15% of ₹50 lakhs).
 

However, with Marginal Relief, the additional tax is computed only on the income that exceeds the ₹2 crores threshold. In this case, it would be ₹50 lakhs. Assuming a simplified tax rate of 30% for income beyond ₹2 crores, the tax liability on this additional income would be ₹15 lakhs (30% of ₹50 lakhs).
 

Marginal Relief ensures that the total tax liability for the AOP is ₹2 crores (tax on ₹2 crores) plus ₹15 lakhs (excess tax on ₹50 lakhs), which totals to ₹2.15 crores. Without Marginal Relief, the tax liability would have been ₹2.22 crores (tax on ₹2.5 crores).
 

This provision effectively prevents an undue surge in tax liability for AOPs in this income bracket, aligning taxation with income levels more equitably.

Income Tax Marginal Relief for Domestic Companies – With Example!

Marginal Relief for Domestic Companies is a provision in the Indian Income Tax Act that aims to ease the tax burden on companies whose taxable income hovers around the threshold where a higher surcharge is applied. This mechanism prevents an abrupt spike in tax liability.
 

Let's delve into an example to understand how Marginal Relief works for domestic companies:
 

Suppose a domestic company, let's call it XYZ Ltd., has a taxable income of ₹5 crores in a given financial year. In this case, the surcharge is levied at a rate of 7% on the income above ₹1 crore. 
 

Without Marginal Relief, XYZ Ltd. would face a surcharge on the entire ₹5 crores, substantially increasing their tax liability. This would amount to ₹35 lakhs (7% of ₹5 crores).
 

However, with Marginal Relief, the surcharge is calculated only on the income exceeding ₹1 crore. In this case, it would be ₹4 crores. Applying the 7% surcharge, the additional tax due to the surcharge would be ₹28 lakhs (7% of ₹4 crores).
 

Marginal Relief ensures that the total tax liability for XYZ Ltd. is ₹1.35 crores (tax on ₹1 crore) plus ₹28 lakhs (excess tax on ₹4 crores), amounting to ₹1.63 crores. Without Marginal Relief, the tax liability would have been ₹1.85 crores (including the surcharge on the entire ₹5 crores).
 

This provision helps to smooth out the tax impact on domestic companies, making the tax structure more equitable for those whose income is near the surcharge threshold.

Conclusion

Marginal Relief is a vital safeguard in taxation, ensuring fairness for individuals, organisations, and domestic companies. 
 

Preventing an undue surge in tax liability due to surcharges aligns taxation with income levels more equitably. As we navigate the complexities of fiscal policies, understanding and leveraging Marginal Relief becomes paramount. 
 

Also, as you may already know, there are many other ways to save on taxes, and proper knowledge about various sections of the Indian Income Tax Act, such as  Section 80C, Section 80D, Section 80E and so on, is essential. It empowers taxpayers to optimise their financial strategies and promotes a more balanced and just tax system.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

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FAQs

How does Marginal Relief impact my tax liability as an individual taxpayer?

Marginal Relief is designed to prevent an excessive increase in tax liability due to surcharges for individuals with incomes above ₹50 lakhs. It calculates the additional tax on the income exceeding this threshold, ensuring a more balanced taxation system. 

This provision helps avoid a disproportionate tax burden and relieves individuals in higher income brackets.

Are there specific criteria for organisations to qualify for Marginal Relief?

Yes, for organisations, Marginal Relief applies to Association of Persons (AOPs) consisting exclusively of companies with a total income exceeding ₹2 crores. 

This provision aims to prevent a sudden surge in tax liability caused by surcharges. It ensures that the tax structure is fair and balanced for AOPs with incomes in this range.

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