Surcharge on Income Tax

Surcharge on income tax is the additional tax payable when income exceeds the specified limit. It is an additional charge on the taxpayers who have a higher income flow during a financial year.

Surcharge on income tax for Individual/AOI/BOP/HUF/Artificial Judicial Person

Surcharge on income tax is calculated on income tax liability before adding a 4% health and education cess.

In the Union Budget 2022, Finance minister Nirmala Sitharaman limits the surcharge for AOPs having companies as its members to 15%. It is applicable for AOPs whose net taxable income exceeds two crores.

Moreover, the surcharge on LTCG (long term capital gains) on listed shares, units, etc. is capped at 15%.

Example: An individual earns a total income of ₹1.5 crore in FY22. Hence, the surcharge is 15% on the income tax computed. Therefore, the total tax liability is:

Marginal relief for Individual/AOI/BOP/HUF/Artificial Judicial Person

1. In case the net taxable income exceeds 50 lakhs but not one crore, taxpayers are required to pay a surcharge of 10% on the income tax computed. Marginal relief is the difference between the excess tax payable on income above 50 lakhs and the amount exceeding 50 lakhs.
2. When the net taxable income exceeds one crore but not two crores, taxpayers need to pay a 15% surcharge. Marginal relief is the difference between the excess tax payable on income above one crore and the amount exceeding one crore.
3. In case the net taxable income exceeds two crores but not five crores, taxpayers are required to pay a surcharge of 25% on the income tax computed. Marginal relief is the difference between the excess tax payable on income above two crores and the amount exceeding two crores.
4. When the net taxable income exceeds five crores, taxpayers need to pay a 37% surcharge. Marginal relief is the difference between the excess tax payable on income above five crores and the amount exceeding five crores.

Importantly, marginal relief is applicable only when the excess tax payable is more than the the amount exceeding the higher income.

Example of Marginal Relief

Suppose an individual earns a total income of ₹51 lakhs in FY22.

Computation of income tax liability:

If the individual had earned ₹50 lakhs:

Difference between tax payable on earning extra 1 lakh= 1,64,250 (14,76,750-13,12,500)

Amount exceeding 50 lakhs= 1,00,000

Therefore, marginal relief= 64,250 (1,64,250-1,00,000)

Hence, tax liability= ₹14,12,500 (14,76,750-64,250)

On earning ₹51 lakhs, the person needs to pay a 10% surcharge, because of which the total tax payable amounts to ₹14,76,750. But if he had earned only ₹50 lakhs, the total tax payable (without health and education cess) amounts to ₹13,12,500. Here, the total income does not exceed ₹50 lakh. Hence, the surcharge is not applicable.

However, a person needs to pay an additional amount which is ₹1,64,250, on earning an extra one lakh. Therefore, the government allows marginal relief. It is the difference between the extra tax payable on higher income (1,64,250) and an amount exceeding ₹50 lakhs (1,00,000). The marginal relief is ₹64,250.

Hence, the tax liability was reduced to ₹14,12,500.

Surcharge on income tax for companies

Domestic Company:

After adding a surcharge to the income tax computed, 4% health and education cess is also added.

The rate of surcharge when a company opts for taxation under section 115BAA or section 115BAB is flat at 10%, irrespective of the total income.

Foreign company:

After adding a surcharge to the income tax computed, a 4% health and education cess is also added.

Surcharge on income tax for partnership firms & LLP

The surcharge rate is 12% when the total income of a partnership firm & LLP exceeds one crore. However, the marginal relief is applicable when the excess tax payable on income above one crore is more than the amount exceeding one crore. Additionally, a 4% health and education cess is also applicable on the income tax and surcharge.

Surcharge on income tax for local authority

The surcharge rate is 12% when the total income of the local authority exceeds one crore. However, the marginal relief is applicable when the excess tax payable on income above one crore is more than the amount exceeding one crore. Additionally, a 4% health and education cess is also applicable on the income tax and surcharge.

Surcharge on income tax for co-operative societies

The surcharge rate is 12% for co-operative societies when the total income exceeds one crore. However, the marginal relief is applicable when the excess tax payable on income above one crore is more than the amount exceeding one crore. Additionally, a 4% health and education cess is also applicable on the income tax and surcharge.

The rate of surcharge when co-operative societies opt for taxation under section 115BAD is flat at 10% irrespective of the total income and 4% cess.