In India, taxpayers encounter a surcharge, an extra tax applied to income tax for specific income brackets. The surcharge kicks in when income surpasses a set threshold, with rates varying based on category and income level.
This post explains the surcharge, its calculation, and provides rates for different taxpayer categories and income brackets under both old and new tax regimes. Additionally, it delves into marginal relief, easing surcharges for certain taxpayers. A comparison between old and new tax regimes, covering tax rates, deductions, exemptions, and surcharge rates, is provided, along with tips for selecting the optimal tax regime based on income and expenses.
What is a Surcharge and How is it Calculated?
The surcharge is an additional tax that is levied on the income tax of certain taxpayers if their total income exceeds a specified threshold. A surcharge is not a flat rate, but a percentage of the income tax payable by the taxpayer. Surcharge is calculated after deducting the deductions and exemptions available to the taxpayer, and before adding the health and education cess and the COVID-19 surcharge.
The purpose of a surcharge is to make the tax system more progressive, i.e., to make the rich pay more tax than the poor. The surcharge also helps the government to raise more revenue for various welfare schemes and development projects.
Surcharge Rates for Different Categories of Taxpayers and Income Brackets
The surcharge rates for different categories of taxpayers and income brackets vary depending on whether the taxpayer opts for the old or the new tax regime. The old tax regime offers more deductions and exemptions, but has higher tax rates, while the new tax regime offers lower tax rates, but has fewer deductions and exemptions. The taxpayer can choose the tax regime that is more beneficial for them, based on their income and expenses.
The following table shows the surcharge rates for different categories of taxpayers and income brackets, for both the old and new tax regimes, for the assessment year 2024-25.
| Category of Taxpayer | Total Income | Surcharge Rate (Old Tax Regime) | Surcharge Rate (New Tax Regime) |
|---|---|---|---|
| Individual/HUF/AOP/BOI/Artificial Juridical Person | Up to Rs. 50 lakh | Nil | Nil |
| Individual/HUF/AOP/BOI/Artificial Juridical Person | Above Rs. 50 lakh and up to Rs. 1 crore | 10% | 10% |
| Individual/HUF/AOP/BOI/Artificial Juridical Person | Above Rs. 1 crore and up to Rs. 2 crore | 15% | 15% |
| Individual/HUF/AOP/BOI/Artificial Juridical Person | Above Rs. 2 crore and up to Rs. 5 crore | 25% | 25% |
| Individual/HUF/AOP/BOI/Artificial Juridical Person | Above Rs. 5 crore | 37% | 37% |
| Domestic Company | Up to Rs. 1 crore | Nil | Nil |
| Domestic Company | Above Rs. 1 crore and up to Rs. 10 crore | 7% | 10% |
| Domestic Company | Above Rs. 10 crore | 12% | 15% |
| Foreign Company | Any income | 2% | 2% |
| Co-operative Society/Local Authority/Firm/LLP | Up to Rs. 1 crore | Nil | Nil |
| Co-operative Society/Local Authority/Firm/LLP | Above Rs. 1 crore | 12% | 12% |
Note: The COVID-19 surcharge of 4% is applicable on the income tax and surcharge of all taxpayers, except those earning up to Rs. 2.5 lakh.
Marginal Relief Provision
The marginal relief provision is a mechanism that reduces the burden of surcharge for certain taxpayers, whose total income exceeds the threshold by a small margin. The marginal relief ensures that the increase in the tax liability due to the surcharge does not exceed the increase in the income that triggers the surcharge.
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The marginal relief is calculated as follows:
Marginal Relief = (Income above the threshold) x (Rate of surcharge + Rate of health and education cess + Rate of COVID-19 surcharge)
The marginal relief is deducted from the tax liability before adding the surcharge, the health and education cess, and the COVID-19 surcharge.
Let us take an example to understand how marginal relief works.
Example: Individual with a Total Income of Rs. 1,00,10,000
Suppose you are an individual with a total income of Rs. 1,00,10,000 for the financial year 2023-24. You have claimed deductions and exemptions of Rs. 2 lakh under the old tax regime, and have opted for the new tax regime with no deductions and exemptions. Your tax liability under both the tax regimes, with and without surcharge and marginal relief, is as follows:
| Tax Regime | Income Tax | Surcharge | Health and Education Cess | COVID-19 Surcharge | Marginal Relief | Total Tax Liability |
|---|---|---|---|---|---|---|
| Old | Rs. 23,16,000 | Rs. 3,47,400 (15% of Rs. 23,16,000) | Rs. 1,06,536 (4% of Rs. 26,63,400) | Rs. 1,06,536 (4% of Rs. 26,63,400) | Rs. 1,50,400 | Rs. 24,25,472 |
| New | Rs. 21,12,500 | Rs. 3,16,875 (15% of Rs. 21,12,500) | Rs. 97,175 (4% of Rs. 24,29,375) | Rs. 97,175 (4% of Rs. 24,29,375) | Rs. 1,50,350 | Rs. 22,83,375 |
As you can see, the surcharge increases your tax liability by Rs. 4,60,472 under the old tax regime, and by Rs. 4,11,375 under the new tax regime. However, the marginal relief reduces your tax liability by Rs. 1,50,400 under the old tax regime, and by Rs. 1,50,350 under the new tax regime. The marginal relief is calculated as follows:
Marginal Relief = (Rs. 10,000) x (15% + 4% + 4%) = Rs. 1,50,400 (Old Tax Regime)
Marginal Relief = (Rs. 10,000) x (15% + 4% + 4%) = Rs. 1,50,350 (New Tax Regime)
The marginal relief ensures that the increase in the tax liability due to the surcharge does not exceed the increase in the income that triggers the surcharge.
However, the new tax regime still offers you a lower tax liability than the old tax regime, by Rs. 1,42,097, even after considering the surcharge and the marginal relief.
Comparison Between the Old and New Tax Regimes
The old and new tax regimes differ in terms of the tax rates, the deductions and exemptions, and the surcharge rates. The old tax regime offers more deductions and exemptions, such as Section 80C, Section 80D, Section 24, etc., but has higher tax rates, ranging from 5% to 30%. The new tax regime offers lower tax rates, ranging from 0% to 30%, but has fewer deductions and exemptions, such as only Section 80CCD(2) and Section 80JJAA.
The following table shows the tax rates for different income slabs, for both the old and new tax regimes, for the assessment year 2024-25.
| Income Slab | Tax Rate (Old Tax Regime) | Tax Rate (New Tax Regime) |
|---|---|---|
| Up to Rs. 2.5 lakh | Nil | Nil |
| Above Rs. 2.5 lakh and up to Rs. 5 lakh | 5% | 5% |
| Above Rs. 5 lakh and up to Rs. 7.5 lakh | 20% | 20% |
| Above Rs. 7.5 lakh and up to Rs. 10 lakh | 20% | 20% |
| Above Rs. 10 lakh and up to Rs. 12.5 lakh | 30% | 30% |
| Above Rs. 12.5 lakh and up to Rs. 15 lakh | 30% | 30% |
| Above Rs. 15 lakh | 30% | 30% |
The surcharge rates for different categories of taxpayers and income brackets are the same for both the old and new tax regimes, except for domestic companies, as shown in the previous section.
Also Read: Fast Track Your Tax Refund: Essential Tips for a Smooth and Efficient ITR Filing Experience
Tips or Suggestions on How to Choose the Best Tax Regime
Choosing the right tax regime hinges on factors like income, expenses, savings, investments, deductions, tax planning, and financial goals. Since each taxpayer's situation is unique, there's no universal solution. Nonetheless, here are some pointers for selecting the optimal regime.
- Compare tax liability under both regimes using online calculators or Excel sheets.
- Assess deductions and exemptions available under the old regime (e.g., Section 80C, 80D, 24) to gauge their impact on taxable income and liability.
- Evaluate the benefits of the new regime, such as lower rates and no taxes on dividends or long-term equity gains, to understand their effect on post-tax income.
- Analyze how various income sources (salary, capital gains, dividends) are taxed under each regime.
- Consider expenses like rent, loan EMIs, and medical bills, and their impact on disposable income and savings.
- Evaluate savings and investments (e.g., provident fund, stocks) and their implications for wealth creation and tax planning.
- Align financial goals (retirement, education, etc.) with budgeting and decisions under both regimes.
- Assess risk appetite, liquidity needs, time horizon, and expected returns about investment strategy under each regime.
- Consider the flexibility and simplicity of compliance under both regimes.
- Seek guidance from tax experts or financial planners to make an informed decision based on individual circumstances and preferences.
Based on these factors, you can choose the tax regime that suits your needs and preferences the best, and that maximizes your net income and wealth.
Closing Remarks
The surcharge is an extra tax imposed on certain taxpayers when their income surpasses a set limit, calculated as a percentage of the income tax due. While it increases tax liability, marginal relief provision eases the burden for some taxpayers.
Old and new tax regimes differ in rates, deductions, and exemptions, allowing taxpayers to choose based on income and expenses. Compare tax liability using online calculators, considering the benefits and drawbacks of each regime, and seek advice from experts for personalized guidance.
