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Concept of Marginal Relief-Back to Basics

Bhavin Shah 
on 17 June 2020

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In recent years it has been observed that the tax outflow for the high-income earners is going up. This is mainly on account of two reasons - (1) reluctance of the Government to cut taxes across the board and
(2) increasing pressure on the Government to charge higher taxes on the rich to compensate a lower tax regime for the middle-income class.

The Government's weapon to charge higher taxes is 'surcharge'. As the name suggests, surcharge is an additional charge / tax payable by the assessees. Over the last few years, the Government has not only widened the scope of applicability of surcharge but has also increased the surcharge rates.

What are the existing surcharge rates?

1. Individual, HUF, AOP, BOI and Artificial Judicial Person

    

Total Income Threshold

Surcharge

≤ INR 50lacs

NIL

> INR 50lacs and ≤ INR 1crore

10%

> INR 1crore and ≤ INR 2crores

15%

> INR 2crores and ≤ INR 5crores

25%

> INR 5crores

37%

 Concept of Marginal Relief-Back to Basics

2. Co-operative society, Firm and Local Authority

    

Total Income Threshold

Surcharge

≤ INR 1crore

NIL

> INR 1crore

12%

3. Domestic Companies (not opted for section 115BAA or 115BAB)

    

Total Income Threshold

Surcharge

≤ INR 1crore

NIL

> INR 1crore and ≤ INR 10crores

7%

> INR 10crores

12%

4. Foreign Companies

    

Total Income Threshold

Surcharge

≤ INR 1crore

NIL

> INR 1crore and ≤ INR 10crores

2%

> INR 10crores

5%

What is Marginal Relief on surcharge?

Various categories of assessees are liable to pay the surcharge on the basis of the total income thresholds tabulated above.

Practically, there may be a situation where the total income of the assessee marginally exceeds a particular threshold and the assessee becomes liable to pay surcharge/surcharge at a higher rate. This results in an additional tax outflow vis-à-vis the additional income earned over and above the threshold.

To avoid such a situation, the income-tax law provides for a concept known as 'Marginal Relief on surcharge'. The basic idea is that the increase in tax liability (due to surcharge) should not exceed the increase in income. If that is the case, the assessee will get marginal relief for the difference amount.

Calculation of Marginal Relief on surcharge

Marginal Relief shall be calculated in the following steps -

Step 1: Calculate tax payable including surcharge on the actual total income
Step 2: Calculate the tax payable including surcharge (if any) on the threshold
Step 3: Calculate additional tax payable [tax on actual (-) tax on threshold]
Step 4: Calculate additional income earned [actual (-) threshold]
Step 5: Marginal Relief = Additional tax payable (-) Additional income earned

Illustration I

    

Steps

Particulars

Individual (aged 55)

Actual Total Income (A)

(A)

51,00,000

Step 1

Tax as per slab rate

Add: Surcharge @10%

13,42,500

1,34,250

14,76,750

Threshold (B)

(B)

50,00,000

Step 2

Tax as per slab rate

13,12,500

Step 3

Additional Tax

Step (1 - 2)

1,64,250

Step 4

Additional Income

(A - B)

1,00,000

Step 5

Marginal Relief

Step (3 - 4)

64,250

Illustration II

    

Steps

Particulars

Domestic Company

Actual Total Income

(A)

10,01,00,000

Step 1

Tax @30%

Add: Surcharge @12%

3,00,30,000

36,03,600

3,36,33,600

Threshold

(B)

10,00,00,000

Step 2

Tax @30%

Add: Surcharge @7%

3,00,00,000

21,00,000

3,21,00,000

Step 3

Additional Tax

Step (1 - 2)

15,33,600

Step 4

Additional Income

(A - B)

1,00,000

Step 5

Marginal Relief

Step (3 - 4)

14,33,600

Illustration III

    

Steps

Particulars

Individual (aged 40)

Actual Total Income

(A)

1,05,00,000

Step 1

Tax as per slab rate

Add: Surcharge @15%

29,62,500

4,44,375

34,06,875

Threshold

(B)

1,00,00,000

Step 2

Tax as per slab rate

Add: Surcharge @10%

28,12,500

2,81,250

30,93,750

Step 3

Additional Tax

Step (1 - 2)

3,13,125

Step 4

Additional Income

(A - B)

5,00,000

Step 5

Marginal Relief

Step (3 - 4)

NIL

 

Note: Marginal relief on surcharge cannot be negative

Marginal Relief on surcharge - Formula
Marginal Relief = Tax on (A) - Tax on (B) - [A - B]

where,

(A) = Actual total income
(B) = Total income threshold

 

The author can be reached at bhs6992@gmail.com

Disclaimer: This article is meant purely for general educational purposes and is not intended to advise or a legal opinion on any particular matter. I accept no responsibility for any errors it may contain, whether caused by negligence or otherwise. Readers are advised to consult their own professional advisors.


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