From classifying income to figuring out the applicable tax rate, the process of calculating tax can be a complicated and time-consuming task. If your income falls under one of the higher tax brackets, a major challenge you’ll face during tax computation is the calculation of surcharge. Since the surcharge rates differ for different individuals and corporations according to the amount and type of income, calculating the surcharge on income tax can be a little confusing. This surcharge is levied by the government to ensure that the country’s richer citizens contribute more than the poorer citizens. However, to ensure a balance, the government also provides taxpayers with marginal relief on the surcharge. This article covers everything you need to know about the surcharge on income tax, how to calculate it, current surcharge rates, and marginal relief.
See also:Â What is annual information statement in income tax?
Surcharge on income tax: What is it?
A surcharge on income tax refers to an extra tax to be paid on your income tax. This additional tax is paid by those whose income is higher than a certain limit specified by the government. In India, a surcharge is levied on the income tax if the annual income is more than Rs 50 lakh for individuals and Rs 1 crore for corporations. According to the Income Tax Act, surcharge on income tax has to be paid by taxpayers whose income comes under the higher tax bracket of 30%.
Surcharge for different taxpayers in FY25
Surcharge rates differ for different categories of taxpayers. Check out the current surcharge rates for various categories.
Surcharge on income tax for individuals, HUF, BOI, AOP, and Artificial Judicial Persons
| Annual income | Surcharge rate on income tax |
| Under Rs 50 lakh | Nil |
| Rs 50 lakh – Rs 1 crore | 10% |
| Rs 1 crore – Rs 2 crore | 15% |
| Rs 2 crore – Rs 5 crore | 25% |
| Over Rs 5 crore | 37% |
It’s worth noting that the enhanced surcharges of 37% and 25% are not levied from income chargeable to tax under sections 111A, 112A and 115AD. Thus, the maximum surcharge rate on tax payable on such incomes will be 15%. All in all, a surcharge of 10% will be levied on those with income between Rs 50 lakh and Rs 1 crore, and a surcharge of 15% will be levied on those with income higher than Rs 1 crore.
Current surcharge rates for domestic companies
| Annual income | Surcharge rate on income tax |
| Under Rs 1 crore | Nil |
| Rs 1 crore – Rs 10 crore | 7% |
| Over Rs 10 crore | 12% |
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Current surcharge rates for foreign companies
| Annual income | Surcharge rate on income tax |
| Under Rs 1 crore | Nil |
| Rs 1 crore – Rs 10 crore | 2% |
| Over Rs 10 crore | 5% |
The surcharge rate applicable for foreign companies is much lower when compared to that applicable on domestic companies because foreign companies are already taxed at a higher rate than domestic companies.
How to calculate a surcharge on income tax?
It is essential to understand that the surcharge is levied on the total income tax you’re required to pay and not on your income. To calculate the surcharge on income tax, follow these steps:
Step 1: Computation of income
To compute your income, take into account the total taxable income after eliminating all the deductions under section 80C and chapter VI-A. Some of the many examples of permitted deductions include:
- PPF Account
- Tax Saving Mutual Funds
- Tax Saving Fixed Deposit
- National Savings Certificate
- Contribution to National Pension Scheme
- Senior Citizen Savings Scheme
- Contribution to Pension Funds
- Payment for treatment of specified disease
- Donations
- Medical insurance premiums
Keep in mind that in addition to the above-mentioned deductions, there are numerous other deductions permitted at the time of income tax return filing.
Step 2: Calculating the payable income tax
Once you have determined your total taxable income, check the tax slab under which it falls. Following are the tax slabs applicable to the annual income.
| Annual income | Income tax rate (For residents under the age of 60) |
| Under Rs 2.5 lakh | Nil |
| Rs 2.5 lakh – Rs 5 lakh | 5% |
| Rs 5 lakh – Rs 10 lakh | 20% |
| Over Rs 10 lakh | 30% |
Old Regime FY 2022-2023.
The surcharge on income tax is your concern only if you fall under the tax slab of 30%. Even then, you’ll only be required to pay a surcharge if your total taxable income is above Rs 50 lakh. The payable income tax would be 30% of your total taxable income.
Step 3: Calculating the surcharge on income tax
Once you’ve calculated the payable income tax, you can easily calculate the applicable surcharge based on the current surcharge rates. For example, if your total taxable income falls between Rs 50 lakh and Rs 1 crore, a surcharge rate of 10% is applicable. So, the total surcharge will be 10% of the total payable income tax.
Calculating surcharge on income tax: Examples
Check out the following examples to see how the surcharge on income tax is calculated.
Example 1: Taxable income is 60 lakh
In this case, the taxable income is between Rs 50 lakh and Rs 1 crore, which means the individual will be required to pay a surcharge of 10% on the income tax. To calculate the surcharge, first calculate the income tax, which will be 30% of the taxable income, amounting to Rs 18 lakh. The applicable surcharge rate is 10%. So, the surcharge amount will be 10% of Rs 18 lakh, which amounts to Rs 1.8 lakh. Therefore, the total payable income tax, inclusive of the surcharge, will be Rs 19.8 lakh (18 lakh + 1.8 lakh).
Example 2: Taxable income is Rs 1.30 crore
In this case, the taxable income is over Rs 1 crore, which means the individual is liable to pay a surcharge of 15%. For calculating the surcharge, first calculate the income tax, which will be 30% of the taxable income, amounting to Rs 39 lakh. The applicable surcharge rate is 15%. So, the surcharge amount will be 15% of Rs 39 lakh, which amounts to Rs 5.85 lakh. Therefore, the total payable income tax, inclusive of the surcharge, will be Rs 44.85 lakh (39 lakh + 5.85 lakh).
What is marginal relief?
As mentioned above, a surcharge on your income tax is levied if your income exceeds Rs 50 lakh. However, in some cases, a surcharge might be levied even if the income exceeds the prescribed limit of Rs 50 lakh marginally. As the name suggests, the concept of marginal relief has been introduced to grant relief to taxpayers whose income marginally exceeds the prescribed limit.
Marginal relief for individuals
The objective of marginal relief is to make sure that the payable income tax amount, inclusive of the surcharge, does not exceed the amount of income which exceeds the limit prescribed. Marginal relief restricts your income tax liability to 40% of the difference between your income and your tax exemption limit. After availing of marginal relief, you are not eligible for receiving any further credits.
Let’s take an example to make things clearer. Assume that the total taxable income of an individual is Rs 51 lakh, which exceeds the prescribed limit, and a surcharge of 10% is applicable. So, the total tax payable amounts to Rs 14,76,750. But, if this individual had earned Rs 50 lakh instead, no surcharge would be applicable, and the total tax payable would be Rs 13,12,500. This means that earning an additional 1 lakh levied extra income tax of Rs 1,64,250.
In such cases, the individual will receive a marginal relief of the difference between the excess tax payable (which is Rs.1,64,250 in this case) and the income tax amount exceeding the prescribed limit of Rs 50 lakh (which is Rs 1 lakh in this case). So, the marginal relief that the individual will receive will amount to Rs 64,250 (Rs1,64,250 – Rs 1,00,000).
Marginal relief for firms
In cases where a firm’s total income exceeds Rs 1 crore, an additional surcharge of 12% will be applied to the income tax payable. However, a marginal relief provision is available for taxpayers with a total income surpassing Rs 1 crore. This provision ensures that the income tax payable (including surcharge) on the higher income does not exceed the income tax payable on Rs 1 crore by an amount greater than the income that exceeds Rs.1 crore.
To illustrate, if a firm’s total income is Rs 1.01 crores, it will be liable to pay a total tax of Rs 32,24,000, including a surcharge of 12%. However, if the total income were exactly Rs 1 crore, the tax payable would have been only Rs 31,20,000. Thus, the firm receives marginal relief amounting to the difference between the excess tax payable on the higher income (Rs 1,04,000) and the amount of income that exceeds Rs.1 crore (Rs 1,00,000 in this case), which results in a marginal relief of Rs 4,000 (Rs 1,04,000 minus Rs 1,00,000).
Marginal relief for companies
Scenario 1: In cases where a domestic company’s total income exceeds Rs 1 crore but does not exceed Rs 10 crore, a surcharge of 7% will be applied to the income tax due. Likewise, foreign companies with total income exceeding Rs 1 crore but less than Rs 10 crores will face a 2% surcharge on the income tax payable.
Marginal relief applies to companies falling within this income bracket. In such cases, the income tax payable (including the surcharge) on the higher income should not exceed the income tax payable on Rs 1 crore by an amount exceeding the income that surpasses Rs 1 crore.
Scenario 2: When a domestic company’s total income exceeds Rs 10 crores, a surcharge of 12% will be imposed on the income tax payable. Similarly, foreign companies with total income surpassing Rs 10 crores will incur a 5% surcharge on the income tax payable.
Marginal relief is available for companies with a total income exceeding Rs 10 crores. In such instances, the income tax payable (including the surcharge) on the higher income should not exceed the income tax payable on Rs 10 crores by more than the amount exceeding Rs 10 crores.
How to save tax?
Managing your taxes wisely can lead to significant savings. Here are some strategies to help you reduce your tax liabilities:
- Invest in a life insurance plan: You can lower your taxable income by investing in a life insurance policy for yourself, your spouse, or your children. Enjoy a deduction of up to 1.5 lakh on the premiums paid towards the policy.
- Secure a health insurance plan: Health insurance not only safeguards your well-being but also offers tax benefits. Avail a tax exemption of up to Rs 25,000 under Section 80D of the Income Tax Act. Additionally, claim an extra benefit of Rs. 25,000 for parents’ health insurance and up to Rs 50,000 if the premiums are paid for senior citizen parents.
- Invest in the National Pension Scheme (NPS): Plan for your retirement while reducing your tax burden. NPS investments qualify for deductions of up to Rs 50,000 under Section 80CCD of the Income Tax Act, 1961.
- Contribute to charitable causes: Supporting charitable institutions not only benefits society but also offers tax relief. Most donations to charitable organisations are eligible for deductions under Section 80G of the Income Tax Act.
By implementing these measures strategically, you can optimise your tax planning and save more of your money. Be sure to consult with a financial advisor or tax expert to make informed decisions tailored to your specific financial situation.
Housing.com POV
Understanding and calculating the surcharge on income tax is crucial for taxpayers, especially those falling under higher income brackets. With surcharge rates varying based on income levels, individuals and corporations must navigate these complexities diligently. Marginal relief provisions offer some respite for taxpayers with incomes marginally exceeding specified limits. By employing tax-saving strategies such as investing in insurance plans, contributing to charitable causes, and utilising deductions available under the Income Tax Act, individuals can optimise their tax planning and achieve significant savings. Consulting with financial advisors or tax experts is advisable to tailor strategies according to individual financial circumstances.
FAQs
What is income tax surcharge?
Income tax surcharge is an additional charge imposed on individuals with higher incomes, in addition to their regular income tax. It is levied based on the tax payable rather than the income earned.
What is the surcharge on income tax for 2023-24?
For the fiscal year 2023-24, the surcharge on income tax remains as follows for both the old tax regime and the new tax regime: 10% if income is above Rs 50 lakh and up to Rs 1 crore 15% if income is above Rs 1 crore and up to Rs 2 crore 25% if income is above Rs 2 crore and up to Rs 5 crore 37% if income is above Rs 5 crore
Who will pay surcharge on income tax?
Income tax surcharge is an additional fee imposed on income tax. It applies to individuals whose income exceeds Rs 50 lakhs and to companies whose income exceeds Rs 1 crore.
How much income is tax free?
As of Budget 2023, individuals can earn income up to Rs 3 lakh without incurring any income tax liability.
What is highest surcharge rate?
Under the new tax regime, the highest surcharge rate imposed on personal income tax has been reduced significantly from 37% to 25%.
Who collects the surcharge on income tax?
The surcharge on income tax goes to the Consolidated Fund of India, which is utilised by the government for various purposes.
When is surcharge levied on individuals?
Surcharge is levied on individuals when their total taxable income exceeds 50 Lakh.
Can individuals claim marginal relief?
Yes, individuals, domestic companies, and foreign companies can claim marginal relief.
How can I save tax?
There are many ways of saving tax. Some of these are: (1) Buy a life insurance plan (2) Get a health insurance plan (3) Donate to charity (4) Invest in National Pension Scheme
