Income Tax Surcharge Rates and Marginal Relief

Additional Surcharge on High-Income Taxpayers

If your income falls within the highest tax bracket of 30%, you may be required to pay an additional surcharge on your tax liability if your income surpasses a specific threshold. Simply put, a surcharge is an extra tax levied on individuals earning beyond a certain limit.

The government imposes a surcharge to ensure that individuals with higher earnings contribute more to the national tax revenue. At the same time, marginal relief is available to certain taxpayers to ease the burden of the surcharge. Below are the detailed provisions:

Budget 2025 Update

Starting from April 1, 2025, the rebate limit for the financial year 2025-26 has been raised from Rs. 25,000 to Rs. 60,000. Consequently, marginal relief, which previously applied to incomes slightly above Rs. 7,00,000, will now be available for those exceeding Rs. 12,00,000.

Surcharge on Income Tax

A surcharge is an additional tax imposed on high-income individuals and entities. It applies to taxpayers whose earnings exceed specified limits within a financial year.

Current Surcharge Rates for Various Taxpayers

The Income Tax Act, 1961, prescribes different surcharge rates for different categories of taxpayers. As per the amendment effective April 1, 2023, the highest surcharge rate under the new tax regime has been reduced from 37% to 25%.

Surcharge Rates for Individuals, HUFs, AOPs, BOIs, and Artificial Judicial Persons

Under the Budget 2023, the highest surcharge under the new tax regime was reduced to 25% from April 1, 2023.

Additional Notes:

• For AOPs where only companies are members, the surcharge is limited to 15% if their total income exceeds Rs. 1 crore.
• A surcharge on long-term capital gains (LTCG) from listed equity shares, units, etc., is capped at 15%.

Surcharge Rates for Domestic Companies

Companies opting for special tax regimes under sections 115BAA or 115BAB are subject to a 10% surcharge without a threshold limit.

Surcharge Rates for Foreign Companies

Surcharge for Firms, LLPs, and Local Authorities

Firms, LLPs, and local authorities with a total income exceeding Rs. 1 crore must pay a surcharge of 12% on the income tax computed.

Marginal Relief for Individuals

Case 1: Income Between Rs. 50 Lakhs and Rs. 1 Crore

If a taxpayer earns between Rs. 50 lakhs and Rs. 1 crore, they are liable to pay a 10% surcharge. However, a marginal relief provision ensures that the excess tax payable (including surcharge) on income above Rs. 50 lakhs does not exceed the actual income exceeding Rs. 50 lakhs.

For example, if an individual earns Rs. 51 lakhs in FY 2023-24:

• The total tax liability, including a 10% surcharge, would be Rs. 14,76,750.
• If the individual’s income were exactly Rs. 50 lakhs, the tax liability would be Rs. 13,12,500.
• The excess tax payable (Rs. 1,64,250) exceeds the additional income earned (Rs. 1,00,000), making the individual eligible for marginal relief of Rs. 64,250.
• The revised tax liability would be Rs. 14,12,500 (excluding cess).

Case 2: Income Between Rs. 1 Crore and Rs. 2 Crore

A 15% surcharge is applicable for incomes between Rs. 1 crore and Rs. 2 crore. However, marginal relief is available to prevent excessive taxation on incremental income.

For instance, if a taxpayer earns Rs. 1.01 crore:

• The tax liability with a 15% surcharge would be Rs. 32,68,875.
• If the income were exactly Rs. 1 crore, the tax liability would be Rs. 30,93,750.
• The excess tax payable (Rs. 1,75,125) is higher than the additional income (Rs. 1,00,000), making the individual eligible for marginal relief of Rs. 75,125.
• The final tax liability after marginal relief would be Rs. 31,93,750 (excluding cess).

Marginal Relief for Firms, LLPs, and Local Authorities

Entities earning more than Rs. 1 crore are subject to a 12% surcharge but can avail of marginal relief to ensure that the excess tax payable does not surpass the additional income earned.

For example, if a firm earns Rs. 1.01 crore:

• The total tax liability with a 12% surcharge would be Rs. 32,24,000.
• If the income were exactly Rs. 1 crore, the tax liability would be Rs. 31,20,000.
• The excess tax payable (Rs. 1,04,000) is higher than the additional income (Rs. 1,00,000), allowing for marginal relief of Rs. 4,000.
• The final tax liability would be Rs. 32,20,000.

Marginal Relief for Companies

Case 1: Domestic Companies with Income Between Rs. 1 Crore and Rs. 10 Crore

• A surcharge of 7% applies, with marginal relief ensuring excess tax payable does not exceed the additional income beyond Rs. 1 crore.

Case 2: Domestic Companies with Income Exceeding Rs. 10 Crore

• A 12% surcharge applies, with marginal relief preventing excessive taxation beyond Rs. 10 crore.

Similarly, for foreign companies:

• A surcharge of 2% applies for income exceeding Rs. 1 crore but below Rs. 10 crore.
• A surcharge of 5% applies for income beyond Rs. 10 crore.

Conclusion

Surcharge on income tax ensures a progressive tax system, with higher earners contributing proportionally more. However, marginal relief provisions prevent undue tax burdens on taxpayers whose income slightly exceeds threshold limits. Understanding these provisions can help individuals and businesses plan their tax liabilities more effectively.

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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.