Demystifying Surcharge on Income Tax: What is It?

Demystifying Surcharge on Income Tax: What is It?

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Jaya
Jaya Sharma
Assistant Manager - Content
Updated on Jul 10, 2024 16:19 IST

When any taxpayer comes under an income tax rate above 30%, the taxpayer is liable to pay an additional surcharge on income tax liability. The government levies surcharge where high net-worth individuals 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.

what is surcharge on income tax

 

Table of Contents

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. 

Total Tax Payable on Surcharge

The total tax payable including surcharge on income tax depends on various factors such as the total income of the taxpayer, 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: Depending on your income bracket, apply the relevant surcharge rate to your income tax liability. For example, if your total income is more than Rs. 50 lakh but less than 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.

Why are Cess and Surcharge Levied Separately?
Why are Cess and Surcharge Levied Separately?
Both cess and surcharge are additional taxes but are different fundamentally. These terms can be confusing for those who are filing their first income tax. Let us understand what these...read more

Surcharge Rate

The surcharge rates applicable to different taxpayers for the Financial Year 2023-24 (AY 2024-25) in India are as follows as per the income tax act:

  1. For Individuals

In case you are opting for the new tax regime or old tax regime, then for Individuals, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), and Artificial Judicial Persons:

Income Slab 

     Total Income

Surcharge Rate

Old Tax Regime

New Tax Regime

Up to Rs. 50 Lakh

Nil

Nil

Above Rs. 50 Lakh and up to Rs. 1 Crore

10%

10%

Above Rs. 1 Crore and up to Rs. 2 Crore

15%

15%

Above Rs. 2 Crore and up to Rs. 5 Crore

25%

25%

Total amount exceed Rs. 5 Crore

37%

25%

For Partnership Firms (including LLPs):

    • 12% surcharge on income tax is applied if the total income exceeds one crore rupees. Marginal relief is available in this case as well.
      Domestic Companies:

For companies

  • That opt for taxation under Section 115BA, 115BAA, and 115BAB, different tax rates apply. The surcharge rates for these companies are:
    • 25% tax rate under Section 115BA.
    • 22% tax rate under Section 115BAA.
    • 15% tax rate under Section 115BAB.
  • Do not opt for these sections, the tax rate is generally 30%The surcharge is applied at different rates based on the income level:
    • 7% when total income surpasses Rs.1 crore but remains below Rs.10 crore.
    • 12% if total income surpasses Rs. 10 crores.

Foreign Companies:

    • 2%: if the total income surpasses Rs. 1 crore but is up to Rs. 10 crores.
    • 5%: if the total income surpasses Rs. 10 crores.

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.

Explore GST and Taxation courses

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. 5,000 (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.

Learn how to file the ITR

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 (income exceeding Rs. 10 crore), bringing 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.

FAQs

On which taxes are surcharges levied?

Surcharges are commonly levied over income tax including other taxes depending on the government's policy.

Is there a way to avoid paying surcharges?

One can reduce tax liability with proper tax planning and income management can potentially. However, it is advisable to consult a tax advisor for personalized advice.

Why are surcharges imposed?

Governments generally impose surcharges for various reasons, like generating extra revenue, discouraging certain activities, or funding specific programs.

Are surcharges deductible from taxable income?

In most cases, no. Surcharges are typically added to your net tax liability rather than reducing your taxable income. However, it is advisable to consult tax consultant within your region of taxation.

 

About the Author
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Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio

Comments

(1)

there are so many forms mentioned while claiming marginal relief for salaried individual with taxable income >50 lakhs. and it is asking to fill the form. which form to be filled?

Reply to Vishal Vyas