Marginal relief is a provision of the Income Tax Act that aims to reduce the tax burden on individuals having an income within a specific range, especially those earning above Rs.50 lakhs.
The application of a surcharge on income exceeding a certain threshold can sometimes lead to a significant increase in tax liability for individuals whose income exceeds the threshold marginally. Marginal relief aims to ensure tax relief for such individuals. Marginal relief is only applicable on individuals who are opting for the new tax regime and is not available to those opting for the new tax regime.
What is the Income Tax Surcharge Rate?
A surcharge refers to an additional charge imposed by the Income Tax Department on any individual, firm or company that falls under the high net income category. The surcharge rate was initiated with the purpose of equality and transparency. It is designed to ensure that high-income earners contribute more to the nation’s revenue.
Marginal Relief in Old Tax Regime
Marginal relief in the old tax regime is applicable in relation to a surcharge. In simple terms, it is applicable on income exceeding Rs.50 lakhs, on which you are required to pay a surcharge. Marginal relief can be claimed on surcharge in the case of both the old and the new regime.
For instance, if an individual’s income surpasses Rs. 50 lakh, marginal relief applies. This ensures that the income tax due (including surcharge) on Rs. 50 lakh does not exceed the surplus income above Rs. 50 lakh.
To illustrate, let’s consider an individual with an income of Rs. 50.1 lakh:
As the income exceeds Rs. 50 lakh but remains below Rs. 1 crore, the individual incurs a surcharge at a rate of 10%, leading to a significant increase in his/her tax liability.
| Total Income | Rs. 50,10,000 |
| Tax on total income as per slab rate (excluding surcharge) | Rs. 11,88,000 |
| Surcharge @10% | Rs. 1,18,800 |
| Total Tax payable (inclusive of surcharge) | Rs. 13,06,800 |
If the income were Rs. 50 lakh, the tax payable would be Rs. 11,85,000 (before surcharge). Therefore, with an increase of Rs. 10,000 in income, the tax liability increases by Rs. 1,21,800. To address this scenario, marginal relief provisions are offered to taxpayers, preventing such significant spikes in tax liabilities.
Surcharge Rates for Different Taxpayers (Current Rates)
There are different rates of surcharge applicable to different taxpayers under the Income Tax Act, 1961. From 1st April 2023, the highest surcharge rate of 37% shall be reduced to 25% under the new tax regime.
Surcharge Rates for Individual/HUF/AOP/BOI/ Artificial Judicial Person
Net Taxable Income limit | Surcharge Rate on the amount of income tax under old tax regime | Surcharge Rate on the amount of income tax under new tax regime |
Less than Rs 50 lakhs | Nil | Nil |
More than Rs 50 lakhs ≤ Rs 1 Crore | 10% | 10% |
More than Rs 1 Crore ≤ Rs 2 Crore | 15% | 15% |
More than Rs 2 Crore ≤ Rs 5 Crore | 25% | 25% |
More than Rs 5 Crore | 37% | 25% |
Marginal Relief for Individuals
According to the Income-tax provisions, a marginal relief will be provided to certain taxpayers up to the amount of the difference between the excess tax payable (including surcharge) on the income above Rs.50 lakhs and the amount of income that exceeds Rs.50 Lakhs.
Suppose, an individual has a total income of Rs.51 Lakhs in a FY 2023-24.
- He will have to pay taxes inclusive of a surcharge of 10% on the tax computed i.e., total tax payable will be Rs. 14,76,750.
- But, if he would have earned only Rs.50 lakhs, then the tax liability would have been Rs.13,12,500 only(excluding cess).
- Isn’t it unfair for the individual? For earning an extra Rs.1,00,000, he will end up paying income tax of Rs.1,64,250. The individual’s tax liability should be reduced to avoid any such excess tax payable.
- The individual will get a marginal relief of the difference amount between the excess tax payable on higher income i.e (Rs.14,76, 750 minus Rs.13,12,500 = Rs.1,64,250 ) and the amount of income that exceeds Rs. 50 Lakhs i.e. (Rs.51,00,000 minus Rs.50,00,000 = Rs.1,00,000).
- The marginal relief will be Rs.64,250 (Rs.1,64,250 minus Rs.1,00,000).
- Hence, income tax liability on income of Rs. 51,00,000 will be Rs.14,12,500 (excluding cess)
Marginal Relief for Firms/LLP/Local Authorities
Where the total income is more than Rs.1 crore, a surcharge of 12% will be levied on the income tax payable. A marginal relief will be provided to such taxpayers having a total income of more than Rs.1 crore i.e., the income tax payable (including surcharge) on the higher income should not exceed the income tax payable on Rs.1 crore by more than the amount of income that exceeds Rs.1 crore. To simplify, if the total income of a firm is Rs.1.01 crores, it will have to pay an income tax inclusive of a surcharge of 12% on the tax computed i.e., total tax payable will be Rs.32,24,000. But, if the total income would have been only Rs. 1 crore, then the tax payable would have been Rs.31,20,000 only. For earning an extra Rs.1,00,000, it will end up paying income tax of Rs.1,04,000.
FAQs
Who is eligible for marginal relief?
The introduction of marginal tax relief in the new tax regime, as outlined in the Union Budget for FY24, provides significant benefits to individuals whose income slightly surpasses the tax-free limit of Rs. 12.75 lakh. This initiative is welcomed as it enables individuals in this bracket to pay considerably less tax.
What is the new surcharge rate under the new tax regime?
The maximum surcharge rate under the new regime is 25% instead of 37%.