Demystifying Surcharge on Income Tax and Marginal Relief

When an Indian taxpayer falls under an income tax rate of 30% or higher, they are liable to pay an additional surcharge on their income tax liability. The government levies a surcharge on high-net-worth individuals who contribute to income tax. The surcharge helps to maintain a balance between the tax payments made by poor and rich individuals. However, the government also provide marginal relief to taxpayers on surcharge.

Table of Contents

• What is Surcharge?
• Total Tax Payable on Surcharge 
• Surcharge Rate 
• Marginal Relief on Surcharge

What is Surcharge?

The surcharge is an additional fee paid for some services or social causes. Usually, it is not included in the quoted price of goods and services. The surcharge is levied for individuals as well as companies. For individuals, the surcharge is applicable on income above 50 lakhs, and for companies, it is charged above Rs 1 crore. 

Surcharge Updates in India

High-income tax adjustment: Under the new tax regime, the surcharge on income tax is levied based on the total income as follows:

• Income above Rs. 50 lakh but up to Rs. 1 crore: 10%
• Income above Rs. 1 crore but up to Rs. 2 crore: 15%
• Income above Rs. 2 crore: 25%

Please note that the surcharge rate for incomes exceeding Rs. 5 crore has been capped at 25%, down from 37%. This change thus reduces the maximum marginal tax rate to 39%, down from 42.74%, for taxpayers opting for the new tax regime.

Enhanced tax relief for lower incomes: Under the new tax system, a significant tax rebate has been introduced. Individuals earning up to Rs. 12 lakh per annum will now be exempt from paying income tax. This measure effectively raises the tax-free income threshold, providing financial relief to a broader segment of taxpayers.

Total Tax Payable on Surcharge

The total tax payable, including the surcharge on income tax, depends on various factors such as the taxpayer's total income, the applicable income tax slab, and the surcharge rate. Surcharge is an additional tax levied on the amount of income tax calculated based on the taxpayer's total income. Here's a general guide on how to calculate it:

• Determine the Income Tax Liability: First, calculate your income tax based on the applicable slab rates for your total income.
• Calculate Surcharge on Income Tax: Apply the relevant surcharge rate to your income tax liability, depending on your income bracket. For example, if your total income exceeds Rs. Between Rs. 50 lakh and Rs. 1 crore, a 10% surcharge is applicable on the income tax.
• Add Cess: After adding the surcharge, apply the Health and Education Cess, which is typically 4% of the income tax plus surcharge.
• Calculate Total Tax Payable: The sum of the income tax, surcharge, and cess gives the total tax liability.

Here's a simplified formula:

Total Tax Payable=Income Tax + (Income Tax × Surcharge Rate) +((Income Tax+ (Income Tax × Surcharge Rate)) × Cess Rate)

For example, if an individual's income tax comes to Rs. 10 lakh and they fall into a surcharge bracket of 10%, the surcharge would be Rs. 1 lakh (10% of Rs. 10 lakh). Adding the 4% cess on Rs. 11 lakh (Rs. 10 lakh income tax + Rs. 1 lakh surcharge), the total tax payable would be Rs. 11 lakh + Rs. 44,000 (4% of Rs. 11 lakh) = Rs. 11.44 lakh.

Surcharge Rate

The rates of surcharge on income tax are applicable to different taxpayers for the Financial Year 2024-25 (AY 2025-26) in India are as follows as per the income tax act:

1. For Individuals

If you are opting for the new tax regime or the old tax regime, then the following categories apply: individuals, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), and Artificial Judicial Persons. As per the Indian tax system, w.e.f. 1st April 2025, the highest surcharge rate of 37% will be reduced to 25% as per the new tax regime.

Surcharge Rates for FY 2025-26

2. For Partnership Firms (including LLPs):

• Tax Rate: 30% flat on total income.

• Surcharge: 12% on income tax if total income exceeds Rs. 1 crore.

• Marginal Relief: Available if surcharge increases tax liability disproportionately.

3. For companies

A. Companies Not Opting for Sections 115BA/115BAA/115BAB

• Tax Rate: 25% (if turnover ≤ Rs. 400 crore in FY 2019-20), otherwise 30%.

• Surcharge:

  • 7% if total income > Rs. 1 crore but ≤ Rs. 10 crore.

  • 12% if total income > ₹10 crore

B. Companies Opting for Special Provisions

• Section 115BA (25% Tax Rate):

  • Surcharge: 7% (income > Rs. 1 crore ≤ Rs. 10 crore), 12% (income > Rs. 10 crore)

• Section 115BAA (22% Tax Rate):

  • Surcharge: 10% (flat, irrespective of income level)3.

• Section 115BAB (15% Tax Rate):

  • Surcharge: 10% (flat, irrespective of income level)

4. For Foreign Companies:

• Tax Rate: 40% on total income.

• Surcharge:

  • 2% if total income > Rs. 1 crore but ≤ Rs. 10 crore.

  • 5% if total income > Rs. 10 crore

Summary

For both domestic and foreign companies, there is also a Health and Education Cess, which is levied at 4% on the amount of income tax plus surcharge. Those who want to learn more about surcharge should enrol in online GST and Taxation courses for further details.

Please note:

• Under sections 111A, 112, 112A and 115AD(1)(b), the surcharge of 25% and 37% will not be levied on the income chargeable to tax or dividend income.
• Surcharge rate for AOP with all members as company will be capped at 15%.
• Surcharge rate will be nill if the total income of specified fund (as referred to in the section 10(4D) includes any income in the respect of securities given under section 115AD(1)(a).

Marginal Relief on Surcharge

Marginal relief is a tax benefit that aims to ease the burden of surcharges levied on taxpayers. By limiting the additional tax due to a surcharge, it ensures a smoother tax climb 

for both individuals and entities. Here's how it works for different categories:

Individuals and Hindu Undivided Families (HUFs):

• Applicable on: If your total income after deductions exceeds Rs. 50 lakh, a 10% surcharge is levied on income exceeding Rs. 50 lakh.
• Relief Calculation: The maximum additional tax payable due to the surcharge is restricted to the amount of income exceeding Rs. 50 lakh.
• Example: Your taxable income is Rs. 55 lakh. Without relief, you'd pay a surcharge of Rs. 50,000 (10% of Rs. 5 lakh). However, with marginal relief, your maximum additional tax is Rs. 5 lakh (income exceeding Rs. 50 lakh), effectively reducing your surcharge burden.

Domestic Companies:

• Applicable on: If your net profit exceeds Rs. 1 crore, a 7% surcharge is levied on income exceeding Rs. 1 crore.
• Relief Calculation: Similar to individuals, the maximum additional tax due to the surcharge is limited to the income exceeding Rs. 1 crore.
• Example: Your company's net profit is Rs. 1.1 crore. Without relief, you'd pay a surcharge of Rs. 7,000 (7% of Rs. 10 lakh). With marginal relief, your maximum additional tax is Rs. 10 lakh, providing significant savings.

Foreign Companies:

• Applicable on: Two different rates apply: a 2% surcharge on income exceeding Rs. 1 crore and a 5% surcharge on income exceeding Rs. 10 crore.
• Relief Calculation: The maximum additional tax principle applies based on the applicable surcharge rate and income thresholds.
• Example: A foreign company has a net profit of Rs. 12 crore. Their surcharge liability without relief would be Rs. 14 lakh (2% of Rs. 1 crore + 5% of Rs. 2 crore). With marginal relief, their maximum additional tax is Rs. 2 crore (for income exceeding Rs. 10 crore), resulting in a substantial reduction in their surcharge burden.

Partnership Firms:

• Applicable on: If the firm's total income exceeds Rs. 1 crore, a 12% surcharge is levied on income exceeding Rs. 1 crore.
• Relief Calculation: The same principle applies as for domestic companies and individuals, limiting the maximum additional tax to the income exceeding Rs. 1 crore.