Understanding Income Tax Surcharge
Taxpayers falling under the higher income bracket, particularly those taxed at 30%, may be required to pay an additional surcharge on their income tax liability beyond a specified threshold. In simple terms, a surcharge is an extra levy imposed on individuals with higher earnings exceeding a predetermined limit.
The objective behind imposing a surcharge is to ensure that individuals with higher income contribute proportionally more in taxes. Additionally, a marginal relief mechanism is in place to mitigate the tax burden for taxpayers falling slightly above the prescribed income threshold.
Budget 2025 Update
For the financial year 2025-26, effective from April 1, 2025, the rebate limit has been increased from Rs. 25,000 to Rs. 60,000. Consequently, marginal relief, which previously applied to income slightly exceeding Rs. 7,00,000, will now be available for income just over Rs. 12,00,000.
Surcharge on Income Tax
A surcharge on income tax is an extra charge applicable to individuals earning above a specific income threshold. This surcharge is calculated as a percentage of the total income tax liability.
Surcharge Rates for Different Taxpayers (Current Rates)
The Income Tax Act, 1961 prescribes varying surcharge rates for different categories of taxpayers. As per recent updates, the highest surcharge rate of 37% has been reduced to 25% under the new tax regime, effective April 1, 2023.
Surcharge Rates for Individual/HUF/AOP/BOI/Artificial Judicial Person
| Net Taxable Income | Old Tax Regime Surcharge | New Tax Regime Surcharge |
| Less than Rs. 50 lakhs | Nil | Nil |
| Rs. 50 lakhs to Rs. 1 crore | 10% | 10% |
| Rs. 1 crore to Rs. 2 crore | 15% | 15% |
| Rs. 2 crore to Rs. 5 crore | 25% | 25% |
| Above Rs. 5 crore | 37% | 25% |
Note: The highest surcharge under the new tax regime has been reduced from 37% to 25%, applicable from April 1, 2023.
Additional Considerations:
- A surcharge of 15% applies to Association of Persons (AOPs) where all members are companies, and their total income exceeds Rs. 1 crore.
- The surcharge on long-term capital gains (LTCG) on listed equity shares, units, etc., is capped at 15%.
Surcharge Rates for Companies
Domestic Companies
| Net Taxable Income | Normal Provisions | Section 115BAA/115BAB |
| Less than Rs. 1 crore | - | 10% |
| Rs. 1 crore to Rs. 10 crore | 7% | - |
| Above Rs. 10 crore | 12% | - |
Note: Surcharge @10% of tax computed under Section 115BAA or 115BAB applies with no threshold limit.
Foreign Companies
| Net Taxable Income | Surcharge Rate |
| Rs. 1 crore to Rs. 10 crore | 2% |
| Above Rs. 10 crore | 5% |
Firms/LLPs/Local Authorities
A surcharge of 12% applies where total income exceeds Rs. 1 crore.
Marginal Relief for Individuals
Marginal relief ensures that taxpayers just above the surcharge threshold do not pay disproportionately higher taxes.
Case 1: Income between Rs. 50 lakhs and Rs. 1 crore
An individual earning slightly over Rs. 50 lakhs is subject to a 10% surcharge. However, marginal relief is granted where the excess tax payable (including surcharge) on income above Rs. 50 lakhs exceeds the additional income itself.
For example, if an individual’s total income is Rs. 51 lakhs in FY 2023-24, the total tax payable would be Rs. 14,76,750. If the income were Rs. 50 lakhs, the tax liability would be Rs. 13,12,500. The marginal relief is calculated as the difference between excess tax payable (Rs. 1,64,250) and the excess income (Rs. 1,00,000), resulting in a marginal relief of Rs. 64,250.
Thus, the final tax liability is adjusted to Rs. 14,12,500 (excluding cess).
Case 2: Income between Rs. 1 crore and Rs. 2 crore
A 15% surcharge applies for income exceeding Rs. 1 crore, with marginal relief ensuring tax liability does not increase disproportionately.
For example, if an individual’s total income is Rs. 1.01 crore, the tax payable would be Rs. 32,68,875, whereas for an income of Rs. 1 crore, it would be Rs. 30,93,750. The marginal relief is calculated as Rs. 75,125, reducing the final tax liability accordingly.
Marginal Relief for Firms/LLPs/Local Authorities
Entities with income exceeding Rs. 1 crore face a surcharge of 12%. Marginal relief is applicable so that tax payable (including surcharge) on the higher income does not exceed the tax on Rs. 1 crore by more than the excess income.
For example, a firm with Rs. 1.01 crore in income would owe Rs. 32,24,000 in tax, whereas the liability at Rs. 1 crore would be Rs. 31,20,000. Marginal relief of Rs. 4,000 would be provided.
Marginal Relief for Companies
Case 1: Domestic Companies with Income between Rs. 1 crore and Rs. 10 crore
- A 7% surcharge applies to domestic companies in this bracket.
- A 2% surcharge applies to foreign companies.
- Marginal relief ensures tax payable (including surcharge) does not exceed the tax on Rs. 1 crore by more than the additional income.
Case 2: Domestic Companies with Income above Rs. 10 crore
- A 12% surcharge applies to domestic companies.
- A 5% surcharge applies to foreign companies.
- Marginal relief is provided in a similar manner to ensure fair tax liability.
Conclusion
The surcharge on income tax ensures that high-income earners contribute more towards government revenues while marginal relief prevents excessive tax burdens on those slightly above the threshold. Recent budget updates have revised the surcharge rates, particularly under the new tax regime, reducing the highest surcharge from 37% to 25%. Understanding these provisions is crucial for taxpayers to optimize their tax planning and ensure compliance with applicable laws.
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Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.
