What Is Surcharge On Income Tax?

What is Surcharge on Income Tax?

In India, a surcharge is an additional tax levied on top of your regular income tax. It applies to individuals, companies, and other taxpayers if their income exceeds certain thresholds.

You pay surcharge on top of your income tax liability when you fall under the upper tax bracket of 30%. It is an additional liability for those who earn a higher income. 

This progressive taxation measure aims to ensure that those with greater financial means contribute proportionately more to government revenues.

IMPORTANT UPDATES:

Budget 2023:

• The government decided to reduce the surcharge rate from 37% to 25% on income above Rs. 5 crores under the new tax regime.

• This reduces the maximum marginal tax rate from 42.74% to 39% in the new tax regime.

Budget 2022:

• The surcharge on Long Term Capital Gains (LTCG) from listed equity shares was capped at 15%.

Surcharge on Income Tax under Old and New Tax Regime in FY 2023 - 2024

Understanding different surcharge rates under the Income Tax Act, 1961 is a difficult process. The following table will help you to identify your surcharge tax bracket:

*Government of India capped the surcharge rate to 25% for individuals and HUFs on income above Rs. 5 crores in Union Budget 2023.

What is Marginal Relief?

Marginal relief is a provision in the Indian Income Tax Act that helps to limit the impact of surcharges on taxpayers in certain income brackets.

It ensures that the total tax liability (including surcharge) does not exceed a certain percentage of the income exceeding the threshold.

Types of Thresholds for Marginal Relief on Surcharge:

• Threshold 1: Rs. 50 lakhs: Applicable to both old and new tax regimes.

• Relief = Difference between:

  • Tax payable (including surcharge) on income exceeding Rs. 50 lakhs, and 

  • Tax payable on the entire income of Rs. 50 lakhs (calculated without surcharge).

• Threshold 2: Rs. 1 crore: Applicable only to the old tax regime.

• Relief = Difference between:

  • Tax payable (including surcharge) on income exceeding Rs. 1 crore, and

  • Tax payable on the entire income of ₹1 crore (calculated without surcharge)

Purpose of Marginal Relief on Surcharge:

The marginal relief prevents a sharp increase in tax liability due to the surcharge for individuals/companies in higher income brackets. It ensures a more gradual increase in tax as income rises.

1. Surcharge Rate for Individuals and Hindu Undivided Families (HUF)

   The surcharge calculation for individuals (resident or non-resident) and Hindu United families are put forth below for three critical scenarios.

   

   Let us understand the surcharge on income tax from the following illustration:

   Let us assume,

   • Taxable Income = TI

   • Tax Payable = TP

   For TI below Rs. 50 lakhs,

   • TP = TI ✕ Tax Rate

   For TI from Rs. 50 lakhs,

   • TP = TI ✕ (Tax Rate + Surcharge Rate)

   Range of Taxable Income	Surcharge Rate	Surcharge on Income Tax
   For TI < Rs. 50 lakhs	No Surcharge	When TI = Rs. 49 lakhs TP = Rs. 49,00,000 × 30%      = Rs. 14,70,000
   For Rs. 50 lakhs < TI ≤ 1 crore	10%	When TI = Rs. 53,00,000 TP = Rs. 53,00,000 × (30% + 10%)      = Rs. 17,49,000
   For TI > 1 crore	15%	When TI = Rs. 1,10,00,000 TP = Rs. 1,10,00,000 × (30% + 15%)      = Rs. 37,95,000

   

2. Surcharge Rate for Partnership Firm

   If your total income exceeds Rs.1 crore, a 12% surcharge will be added to your income tax. However, there's a relief provision for taxpayers with income over Rs. 1 crore. The income tax (including surcharge) on the higher income should not exceed the tax payable on Rs. 1 crore by more than the amount exceeding Rs.1 crore.

   Illustration of Surcharge on Income Tax for Partnership Firm:

   When the firm's total income is Rs. 1 crore, (I) = Rs. 1,00,00,000

   • Tax without surcharge (T) = Rs. 31,20,000

   • Surcharge (S) = 0%

   Total tax with surcharge (TT) = T + S = Rs. 31,20,000

   When the firm's total income is Rs. 1.01 crores (I) = Rs. 1,01,00,000

   • Tax without surcharge (T) = Rs. 31,20,000

   • Surcharge (S) is applicable as the income exceeds Rs. 1 crore

   Total tax with surcharge (TT) = T + S = Rs. 32,24,000

   Here,

   The surcharge on additional income of Rs. 1 lakhs is:

   • Surcharge (S) = TT (total tax with surcharge for I = 1,01,00,000) - T (total tax without surcharge for I = 1,00,00,000)

   • S = Rs. 32,24,000 - Rs. 31,20,000 = Rs. 1,04,000

   However, the firm gets a marginal relief for the additional income above Rs. 1 crore:

   Marginal Relief (MR) = S (Surcharge on additional income) - (I - 1,00,00,000)

   • MR = Rs. 1,04,000 - Rs. 1,00,000 = Rs. 4,000

   • Therefore, the marginal relief is Rs. 4,000

3. Surcharge Rate for Local Authority

   The local government will incur income tax at 30% of taxable income. If the income surpasses Rs. 1 crore, an additional 12% surcharge will apply, with consideration for marginal relief.

4. Surcharge Rate for Domestic Company

   If the annual turnover of your domestic company falls between Rs. 1 crore and Rs. 10 crore,  7% surcharge is levied on your income tax. For companies within this income range, a marginal relief is offered. This relief equals the difference between the income tax (including surcharge) on the higher income and the amount exceeding Rs. 1 crore.

In Conclusion

The surcharge on income tax in India serves as an additional levy on high-income individuals and corporations, which aims to generate extra revenue for the government. Its impact on overall tax liability and economic behaviour necessitates careful consideration. Striking a balance between revenue needs and promoting economic growth remains a crucial aspect for effective tax policy in India.