Income Tax Surcharge Rate & Marginal Relief

A tax surcharge in Income Tax refers to an additional levy imposed on taxpayers whose income exceeds a certain threshold.

It is a supplemental tax applied to the regular income tax liability and is calculated as a percentage of the total income tax payable.

The purpose of the tax surcharge is to ensure that individuals with higher incomes contribute a more significant proportion of their earnings towards government revenue. It is typically implemented as a progressive tax, meaning the surcharge rate increases as the income level rises.

Note:
The surcharge on long-term capital gains(LTCG) on listed equity shares, units, etc., is 15%.
The above surcharge rates are as for Assessment Year 2024-2025. These can be revised every year. Therefore, check the latest surcharge rates for proper calculation.

The surcharge is an additional levy imposed on top of the regular income tax, targeting those with higher earnings. The surcharge rates are progressive, meaning they increase as the taxable income rises. Individuals or entities falling into higher income brackets are subjected to higher surcharge rates.

The liability for tax surcharge applicability primarily falls on individuals or entities with relatively higher incomes. These include high-income individuals, large corporations, partnerships, and other entities generating substantial revenue.

Marginal relief is a provision in the Income Tax Act designed to provide relief to taxpayers whose income exceeds certain thresholds, resulting in higher tax liabilities due to the application of surcharges.

Marginal relief considers factors such as the taxpayer's total income, applicable surcharge rates and the difference between the excess tax payable due to surcharge and the amount of income exceeding the threshold.

When an individual's taxable income crosses a specified limit, they become subject to a surcharge, which is an additional tax applied on top of the regular income tax. However, in some cases, the imposition of a surcharge can lead to disproportionately high tax burdens, especially for those whose income falls just above the threshold.

Marginal relief is a provision that helps individuals who fall into a higher tax bracket due to a slight increase in their income. It aims to provide relief to taxpayers who are subject to a higher surcharge on their income exceeding a certain threshold.

For instance, let's say an individual's income is slightly above the threshold where a higher surcharge applies. Without marginal relief, they would end up paying significantly more tax due to the surcharge on that additional income.

Marginal relief steps in to reduce this burden by calculating the difference between the tax payable with and without the surcharge. It then provides relief on the excess tax paid, ensuring that individuals are not unfairly penalised for a marginal increase in their income.

Scenario

Assuming a resident individual with a gross total income as below in Assessment Year 2024-2025.

Case 1: ₹50 Lakhs

Case 2: ₹51 Lakhs

Analysis:

Here, the total income increased by ₹1 Lakh, but the total tax payable increased by ₹1,64,250. This would be unfair for an assessee to pay an additional increased tax on a limited increase in income. Hence, here the marginal relief will be provided to the assessee.

Marginal Relief = ₹1,64,250 - ₹1,00,000 = ₹64,250

Total Tax Payable before cess = ₹14,76,750 - ₹64,250 = ₹14,12,500

In the example provided, when an individual's total income is ₹ 51 Lakhs, the tax liability, including a surcharge of 10%, amounts to ₹14,76,750 without considering marginal relief.

However, with marginal relief applied, the tax liability reduces to ₹14,12,500. This illustrates how marginal relief mitigates the impact of higher taxes on individuals earning just above the threshold, ensuring a fairer tax system.

Saving yourself from paying higher taxes in comparison to additional income is possible with marginal relief. But what about ensuring proper financial planning with tax-saving instruments?

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Having health insurance is important because it helps protect you and your family from financial hardships caused by unexpected medical emergencies. It encourages individuals to prioritise their health while simultaneously enjoying tax benefits provided by the government.

While surcharge rates impose additional taxes on higher-income individuals and entities, marginal relief serves as a mechanism to mitigate the disproportionate tax burden caused by small increases in income. It ensures that taxpayers are not unfairly penalised for marginal income increments, promoting equity and fairness in the tax system.

Understanding these concepts is essential for taxpayers to comprehend how their income tax obligations are calculated and how certain provisions mitigate the impact of higher tax rates on specific income brackets. In this article, we will delve into the nuances of income tax surcharge rates and marginal relief, shedding light on their significance in the taxation landscape.