Surcharge on Income Tax – A Complete Detailed Guide on Surcharge on Income Tax

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In simple words, surcharge is a tax charged on the tax payable, instead of the amount of income generated. For example, you earn Rs. 10,000 out of which tax chargeable is Rs. 3000. Hence, the 10% surcharge on Rs. 3000 would be Rs. 300. If the income of an individual is above Rs. 50 lakhs a 10% surcharge would be chargeable in India. If income is above Rs. 1 Cr a 15% surcharge would be levied. If you run a company, it would be levied if your income is above Rs. 1 Cr.

Union Budget 2019 – Surcharge Rates Revised for Higher-Income Groups

The revision of surcharge rates for individuals on high-income groups has been proposed in the Union Budget 2019. For people who earn from Rs. 50 Lakh to Rs. 1 Crore and from Rs. 1 Cr. to Rs. 2 Cr., the rate of surcharge on income tax remained unchanged in Union Budget 2019 i.e. 10% in FY 2018-19 and 15% for FY 2018, respectively.

Here are new surcharge rates proposed in Budget 2019:
  • 25% for annual income ranges from Rs. 2 Cr. to Rs. 5 Cr. for the Financial Year 2019-20.
  • 37% for annual income above Rs. 5 Cr for FY 2019-20.

Earlier 15% surcharge on income tax was levied for the AY 2019-20 and new surcharge of income tax will be chargeable on income earned in Financial Year 2019-20, i.e. AY 2020-21. The effective rate of tax would be 39% for people who earn Rs. 2 Cr. to Rs. 5 Cr. per annum for Financial Year 2019-20. The effective rate of tax would be 42.7% for people whose income exceeds Rs. 5 Cr in FY 2019-20 due to surcharge hike in Financial Year 2019-20.

Surcharge for Individuals

The surcharge was initially 10% on individuals with an annual income of above Rs. 1 Cr. In the 2015 Budget, the rate was increased to 12%, and in the 2016 Budget, the rate was further increased to 15%. Individuals with income above Rs. 50 Lakh were also levied with a surcharge in 2017. Companies are also liable for surcharge payable on income exceeding Rs. 1 Crore.

How Much is Health and Education Cess?

Along with surcharge, all individuals who are paying income tax also need to pay health and education cess of 4%. The surcharge and cess are charged on income tax payable, instead of income. For example, if you pay Rs. 3000 on the income of Rs. 10,000, you would pay 4% on Rs. 3000 as health and education cess, i.e. Rs. 120. There is no threshold and surcharge and cess on income tax would be payable by every assessee.

Current Surcharge Rates

Here are the rates of surcharge and thresholds in several assesses –

Body of Individuals (BOI), Individuals, Hindu Undivided Families (HUFs), Artificial Judicial Person (AJP), and Association of Persons (AOP)

Net Income Surcharge rate
Below Rs. 50 LakhsNil
From Rs. 50 Lakhs to Rs. 1 Cr.10%
Above Rs. 1 Cr.15%

 

Domestic Company – Here are the rates of surcharge applicable –

Net Income Surcharge rate
Below Rs. 1 CroreNil
From Rs. 1 Cr. to Rs. 10 Crore7%
Above Rs. 10 Cr.12%

 

Foreign Company (Income Tax Act, 1961) –  The whole control and management of a foreign company is based outside India. For a foreign company, here are the surcharge rates levied –

Net Income Surcharge rate
Below Rs. 1 CroreNil
From Rs. 1 Cr. to Rs. 10 Crore2%
Above Rs. 10 Cr.5%

 

The surcharge rate is low for foreign companies as compared to that of individuals and domestic companies as foreign companies already pay higher taxes than other taxable bodies.

Income Tax Surcharge Calculation

To calculate the GTI or Gross Total Income, incomes from five different heads are summed up. Then, this Gross Total Income is cut by several deductions to calculate the Net Total Income under Chapter VI A. Tax is calculated on this income. The rate of tax is charged on whether the taxable body is a firm, domestic company, or an individual. The rate of surcharge is applicable on the amount of tax after calculating the tax. One can calculate the surcharge on Income Tax, not the overall income. Instead, one can determine whether the surcharge is applicable on the basis of income. One can calculate the surcharge on the tax after calculating the total income of an individual.

Here are some of the examples of taxable individuals to calculate the surcharge and whether it is applicable –

  • When Rs. 49 Lakh is Taxable Income – Suppose an individual earns Rs. 49 Lakh as taxable income, a surcharge is not applicable as Rs. 50 Lakh is the minimum threshold limit. Hence, the individual will pay only income tax.
  • When Rs. 53 Lakh is Taxable Income – Since taxable income is above Rs. 50 Lakh of an individual in this case but below Rs. 1 Cr, a surcharge of 10% is levied. According to the slab rate, income tax will be calculated on Rs. 53 Lakh, i.e. Rs. 14,02,500. In this case, the surcharge would be 10% of Rs. 14,02,500. This way, the surcharge is Rs. 1,40,250. Inclusive of surcharge (Rs. 14,02,500 + Rs. 1,40,250), the total income tax payable is Rs. 15,42,750.
  • When Rs. 1.10 Crore is Taxable Income Since taxable income is above Rs. 1 Crore, in this case, an individual has to pay 15% surcharge. The income tax would be estimated according to the slab rate, i.e. Rs. 31,12,500. In that case, the surcharge would be 15%. Hence, the surcharge would be Rs. 4,66,875 (i.e. 15% of Rs. 31,12,500). Including surcharge (Rs. 31,12,500 + Rs. 4,66,875), the total income tax payable is Rs. 35,79,375.

Here are some of the examples of tax calculation to get a clear insight into the applicability of surcharge on domestic companies:

  • When Rs. 95 Lakh is Taxable Income – Suppose taxable income of your domestic company is Rs. 95 Lakh, it would be taxable @ 30%. Since your company has a taxable income lower than Rs. 1 Crore, which is a minimum threshold limit, there is no surcharge levied. You would have to pay tax according to the tax rate slab.
  • When Rs. 1.10 Cr. is Taxable Income – Suppose your domestic company earns Rs. 1.10 Crore, it would be taxable @30% plus 7% surcharge on the tax (since taxable income is within Rs. 1 Cr to Rs. 10 Cr. bracket). The income tax would be Rs. 33,00,000, i.e. 30% of Rs. 1.10 Crore. In this case, 7% would be the rate of surcharge, i.e. Rs. 2,31,000, i.e. 7% of Rs.33,00,000. Hence, the total tax payable is Rs. 35,31,000 (income tax + surcharge).
  • When Rs. 15 Cr is Taxable Income – Since taxable income is above Rs. 10 Cr in this case, income tax of 30% would be liable. As per the tax slab, the income tax on this amount of income is Rs. 4.5 Cr. In this case, the rate of surcharge levied is 12%. Hence, the surcharge is 0.54 Cr. Including surcharge, the total income tax payable is Rs. 5.04 Cr (i.e. 4.5 Cr + 0.54 Cr.). 

In case of a foreign company, here are the examples of calculation and applicability of surcharge:

  • When Rs. 95 Lakh is Taxable Income – If a foreign company earns Rs. 95 Lakh as taxable income, 40% of income tax is levied. In that case, surcharge is not applicable as total taxable income is below the minimum limit of Rs. 1 Crore. Hence, 40% of tax which is payable is Rs. 38,00,000 from Rs. 95 Lakh.
  • When Rs. 1.10 Cr is Taxable Income – Suppose taxable income of a foreign company is Rs. 1.10 Cr, the income tax would be charged @40%, as taxable income falls in Rs. 1 Cr to Rs. 10 Cr bracket. In addition, a surcharge of 2% would be payable. This way, the income tax of 40% would be Rs. 44,00,000. In addition, the surcharge of 2% on Rs. 44,00,000 would be Rs. 88,000. Inclusive of surcharge (44,00,000 + 88,000), the income tax payable is Rs. 44,88,000.
  • When Rs. 15 Cr. is taxable income – Since the taxable income is above Rs. 10 Cr, the surcharge of 5% would be levied in this case on income tax. The normal tax rate for income above Rs. 10 Cr. is 40%. Hence, it amounts to Rs. 6 Cr. In this case, the rate of surcharge applicable is 5% on Rs. 6 Cr, i.e. Rs. 30 Lakh. This way, Rs. 6.3 Cr would be the total income tax payable (i.e. Rs. 6 Cr + Rs. 0.30 Ct).

What is Marginal Relief?

If total income exceeds the minimum threshold limit given, a surcharge is levied. All the companies and individuals would have to pay the surcharge if total income exceeds Rs. 1 Cr. and Rs. 50 Lakh respectively. Even when the income marginally exceeds the limit, the assesses might be liable for a surcharge in some cases. Marginal relief is a concept to help those assess. It is a relief granted from the levy of surcharge to the taxpayer if he has to pay a surcharge because his income exceeds the prescribed limit marginally.

Marginal relief is the concept aimed to ensure that the tax payable plus surcharge doesn’t exceed the income which goes above the threshold limit marginally. Suppose an individual earns above Rs. 50 Lakhs, he would be eligible for marginal relief. It is important to ensure that the payable income tax (plus surcharge) on Rs. 50 Lakh doesn’t cross the threshold limit.

Let’s make it easier by keeping the income of an individual Rs. 50.1 Lakh. Since the income of an individual is below Rs. 1 Cr. and slightly above Rs. 50 Lakh, the surcharge of 10% would be levied.

Here’s the calculation of liable tax, including surcharge:
Total Income50,10,000
Tax as per slab rate, on total income 13,15,500
Surcharge, i.e. 10% on tax1,31,550
Total Tax (including surcharge) 14,47,050

 

If the income was Rs. 50 Lakhs, the tax payable would be Rs. 13,12,500 (excluding surcharge). When income is raised by Rs. 50,000, the tax levied was raised by Rs. 1,34,550. Hence, marginal relief is provided to them.

Marginal Relief Calculation

Considering the above calculation of income tax, here are the steps to calculate Marginal Relief –

  • Income tax and surcharge calculation – The income tax (including surcharge) is Rs. 14,47,050 on Rs. 50,10,000 as calculated above in this case.
  • Compare incremental tax with added income – Incremental salary is Rs. 10,000 (50,10,000 – 50,00,000).

Hence, Incremental tax would be Rs. 1,34,550 = 14,47,050 (income tax on 50,10,000 including surcharge) – 13,12,500 (income tax charged on Rs. 50,00,000).

As incremental tax is above incremental income, i.e. Rs. 10,000, in this case, Marginal Relief is given to the assessee. Including surcharge, the total incremental tax should be limited to Rs. 10,000 on the basis of marginal relief concept.

  • Calculating Surcharge with marginal relief – Total income is Rs. 50,10,000 in this case and income tax on which is Rs. 13,15,500 (excluding surcharge). On the other side, income tax payable would be Rs 13,12,500 if total income was Rs. 50,00,000. This way, Rs. 3000 is the incremental income tax (exclusive of surcharge).

Hence, Rs. 10,000 would be the incremental income tax (including surcharge) and incremental income tax would be Rs. 3000 (excluding surcharge). Total Surcharge minus Marginal relief is Rs. 7000 (10000-3000).

Here’s how income tax is calculated inclusive of surcharge:
Net Income 50,10,000
Income Tax (exclusive of surcharge) 13,15,500
Plus Surcharge (after considering marginal relief) 7,000
Total tax payable after marginal relief 13,22,500

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