What Is Surcharge On Income Tax?

The Union Budget 2024 decided to keep the surcharge on income tax unchanged for the new tax regime and the old tax regime. The surcharge is an additional levy imposed by the government on individuals or entities with higher taxable incomes. It is calculated as a percentage of the income tax payable and is applied on top of the regular tax liability. In this article, you will learn about the surcharge on income tax in the old tax regime in FY 2023-24.

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What is Surcharge on Income Tax?

In India, a surcharge is an additional tax levied on top of your regular income tax. It applies to individuals, companies, and other taxpayers if their income exceeds certain thresholds.

You pay surcharge on top of your income tax liability when you fall under the upper tax bracket of 30%. It is an additional liability for those who earn a higher income. 

This progressive taxation measure aims to ensure that those with greater financial means contribute proportionately more to government revenues.

IMPORTANT UPDATES:

Budget 2023:

  • The government decided to reduce the surcharge rate from 37% to 25% on income above Rs. 5 crores under the new tax regime.

  • This reduces the maximum marginal tax rate from 42.74% to 39% in the new tax regime.

Budget 2022:

Surcharge on Income Tax under Old and New Tax Regime in FY 2023 - 2024

Understanding different surcharge rates under the Income Tax Act, 1961 is a difficult process. The following table will help you to identify your surcharge tax bracket:

Type of Taxpayer Net Income Threshold Surcharge on Income Tax
Old Tax Regime (FY 2023 - 24)  New Tax Regime (FY 2023 - 24)
Individual/ HUF/Association of Persons/ Body of Individuals Rs. 50 lakhs - Rs. 1 crore 10% 10%
Individual/ HUF /Association of Persons/ Body of Individuals Rs. 1 crore - Rs. 2 crores 15% 15%
Individual/ HUF /Association of Persons/ Body of Individuals Rs. 2 crores -  Rs. 5 crores 25% 25%
Individual/ HUF /Association of Persons/ Body of Individuals > 5 crores 37% 25%*
Firm/LLP/Local Authorities/ Cooperative Society > Rs. 1 crore 12% 12%
Domestic Companies Rs. 1 crore - Rs. 10 crores 7% 7%
Domestic Companies > Rs. 10 crores 12% 12%
Foreign Companies Rs. 1 crore - Rs. 10 crores 2% 2%
Foreign Companies > Rs. 10 crores 5% 5%

*Government of India capped the surcharge rate to 25% for individuals and HUFs on income above Rs. 5 crores in Union Budget 2023.

What is Marginal Relief?

Marginal relief is a provision in the Indian Income Tax Act that helps to limit the impact of surcharges on taxpayers in certain income brackets.

It ensures that the total tax liability (including surcharge) does not exceed a certain percentage of the income exceeding the threshold.

Types of Thresholds for Marginal Relief on Surcharge:

  • Threshold 1: Rs. 50 lakhs: Applicable to both old and new tax regimes.

  • Relief = Difference between:

    • Tax payable (including surcharge) on income exceeding Rs. 50 lakhs, and 

    • Tax payable on the entire income of Rs. 50 lakhs (calculated without surcharge).

  • Threshold 2: Rs. 1 crore: Applicable only to the old tax regime.

  • Relief = Difference between:
    • Tax payable (including surcharge) on income exceeding Rs. 1 crore, and

    • Tax payable on the entire income of ₹1 crore (calculated without surcharge)

Purpose of Marginal Relief on Surcharge:

The marginal relief prevents a sharp increase in tax liability due to the surcharge for individuals/companies in higher income brackets. It ensures a more gradual increase in tax as income rises.

  1. Surcharge Rate for Individuals and Hindu Undivided Families (HUF)

    The surcharge calculation for individuals (resident or non-resident) and Hindu United families are put forth below for three critical scenarios.

    Let us understand the surcharge on income tax from the following illustration:

    Let us assume,

    • Taxable Income = TI

    • Tax Payable = TP

    For TI below Rs. 50 lakhs,

    • TP = TI ✕ Tax Rate

    For TI from Rs. 50 lakhs,

    • TP = TI ✕ (Tax Rate + Surcharge Rate)

    Range of Taxable Income  Surcharge Rate Surcharge on Income Tax
    For TI < Rs. 50 lakhs No Surcharge
    • When TI = Rs. 49 lakhs
    • TP = Rs. 49,00,000 × 30%
         = Rs. 14,70,000
    For Rs. 50 lakhs < TI ≤ 1 crore 10%
    • When TI = Rs. 53,00,000
    • TP = Rs. 53,00,000 × (30% + 10%)
         = Rs. 17,49,000
    For TI > 1 crore 15%
    • When TI = Rs. 1,10,00,000
    • TP = Rs. 1,10,00,000 × (30% + 15%)
         = Rs. 37,95,000

    Invest & Save upto ₹46,800 per annum in taxInvest & Save upto ₹46,800 per annum in tax
  2. Surcharge Rate for Partnership Firm

    If your total income exceeds Rs.1 crore, a 12% surcharge will be added to your income tax. However, there's a relief provision for taxpayers with income over Rs. 1 crore. The income tax (including surcharge) on the higher income should not exceed the tax payable on Rs. 1 crore by more than the amount exceeding Rs.1 crore.

    Illustration of Surcharge on Income Tax for Partnership Firm:

    When the firm's total income is Rs. 1 crore, (I) = Rs. 1,00,00,000

    • Tax without surcharge (T) = Rs. 31,20,000

    • Surcharge (S) = 0%

    Total tax with surcharge (TT) = T + S = Rs. 31,20,000

    When the firm's total income is Rs. 1.01 crores (I) = Rs. 1,01,00,000

    • Tax without surcharge (T) = Rs. 31,20,000

    • Surcharge (S) is applicable as the income exceeds Rs. 1 crore

    Total tax with surcharge (TT) = T + S = Rs. 32,24,000

    Here,

    The surcharge on additional income of Rs. 1 lakhs is:

    • Surcharge (S) = TT (total tax with surcharge for I = 1,01,00,000) - T (total tax without surcharge for I = 1,00,00,000)

    • S = Rs. 32,24,000 - Rs. 31,20,000 = Rs. 1,04,000

    However, the firm gets a marginal relief for the additional income above Rs. 1 crore:

    Marginal Relief (MR) = S (Surcharge on additional income) - (I - 1,00,00,000)

    • MR = Rs. 1,04,000 - Rs. 1,00,000 = Rs. 4,000

    • Therefore, the marginal relief is Rs. 4,000

  3. Surcharge Rate for Local Authority

    The local government will incur income tax at 30% of taxable income. If the income surpasses Rs. 1 crore, an additional 12% surcharge will apply, with consideration for marginal relief.

  4. Surcharge Rate for Domestic Company

    If the annual turnover of your domestic company falls between Rs. 1 crore and Rs. 10 crore,  7% surcharge is levied on your income tax. For companies within this income range, a marginal relief is offered. This relief equals the difference between the income tax (including surcharge) on the higher income and the amount exceeding Rs. 1 crore.

In Conclusion

The surcharge on income tax in India serves as an additional levy on high-income individuals and corporations, which aims to generate extra revenue for the government. Its impact on overall tax liability and economic behaviour necessitates careful consideration. Striking a balance between revenue needs and promoting economic growth remains a crucial aspect for effective tax policy in India.

FAQ's

  • What is the surcharge on income tax 2023 24?

    The surcharge on income tax for the financial year 2023-24 (which is assessed in the assessment year 2024-25) depends on your income bracket:
    Income Range Surcharge Rates for FY 2023-24 (AY 2024-25)
    Old Tax Regime FY 2023-24 New Tax Regime FY 2023-24
    Rs. 50 lakhs- Rs. 1 crore 10% 10%
    Rs. 1 crore- Rs. 2 crores 15% 15%
    Rs. 2 crores- Rs. 5 crores 25% 25%
    Rs. 5 crores- Rs. 10 crores 37% 25%
    Rs. 10 crores & above 37% 25%
  • How are surcharge and cess calculated?

    A surcharge is an additional tax levied on top of the income tax you already owe. Surcharge is calculated on the amount of income tax payable, not on your total income.

    A cess is a fixed-rate tax levied on top of other taxes, such as income tax and surcharge. In India, there is a single health and education cess of 4% levied on income tax and surcharge. Cess is calculated on the total amount of income tax and surcharge payable.

  • What is the surcharge rate for TDS?

    The surcharge rate for TDS depends on several factors, including:
    • Resident individuals and HUFs: No surcharge is applicable for residents, regardless of the payment amount.

    • Non-resident individuals and firms: If the payment exceeds Rs. 1 crore, a surcharge of 15% applies.

    • Non-resident companies:

      • For payments exceeding Rs. 1 crore and up to Rs. 10 crore, a surcharge of 2% applies.

      • For payments exceeding Rs. 10 crore, a surcharge of 5% applies.

  • How to save on tax?

    To save on tax, the person must invest in health insurance, life insurance, a national pension scheme, or donate to charity. Health insurance offers tax benefits as per Section 80D of the Income Tax Act. Life insurance can offer up to INR 1,50,000 as tax exemption. National Pension Scheme offers up to INR 50,000 as a tax deduction. Most donations to a charitable institution are tax-deductible.
  • Is it mandatory to file an income tax return if the annual income is lower than INR 3.00 lakh?

    It is not mandatory to file Income Tax Return in this case. However, if the individuals file an income tax return as 'Nil Return,' then the document can be used as income proof.
  • How to avoid a surcharge?

    If the taxable income falls below a certain tax bracket, then only it is possible to avoid the surcharge. However, the surcharge is subject to marginal relief.
  • How to get the best benefits of marginal relief?

    Marginal relief offers benefits when a high surcharge is paid.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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