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DYK: what is marginal relief on surcharge for individuals

Every individual has to pay surcharge on income if it exceeds a certain level

Income tax slabs differ based on age—below 60 years, between 60-80 years and above 80 years. Besides that, there are different tax rates, 10%, 20% and 30%. The super rich assessees have to pay a surcharge, or tax-on-tax, over and above this tax rate.

Surcharge was implemented by the United Progressive Alliance (UPA) government in the 2013-14 budget. It was meant only for the assessment year (AY) 2014-15, but was carried over in the interim budget in February 2014, and then again in the budget presented in July 2014, for AY2015-16.

Every individual has to pay surcharge on income if it exceeds a certain level. When does income attract surcharge and what does it mean to get marginal relief in case of surcharge?

WHEN IS SURCHARGE APPLICABLE?

Surcharge is applicable if net taxable income of an assessee exceeds 1 crore. To calculate the net taxable income, take the gross total income and deduct the investments and expenses that qualify for deduction under various sections of the income tax Act. For instance, if an individual’s gross total income is 1.03 crore, out of which she invests 1.5 lakh in different avenues (such as Public Provident Fund, equity-linked savings scheme, Kisan Vikas Patra, and so on), this amount qualifies for deduction under section 80C. Apart from this, she is also servicing a home loan, where she paid 2 lakh as interest for the year, and which qualifies for deduction under section 24. Taking into consideration her investment and expenses, her net taxable income after deduction comes to 99.50 lakh [1.03 crore (gross income) minus 3.5 lakh (combined deduction)]. As her net taxable income is less than 1 crore, it does not attract surcharge. If she didn’t have a home loan, her net taxable income would be 1,01,50,000, and would attract surcharge. As per the income tax Act, a 10 % surcharge has to be paid if net income exceeds 1 crore. But it is subject to marginal relief.

WHAT IS MARGINAL RELIEF?

This is applicable in cases where a person’s net income exceeds 1 crore, and thus attracts surcharge, but the amount payable as surcharge is more than the income above 1 crore. In such cases, giving relief to the tax payers, the amount of surcharge does not exceed the net income over and above 1 crore.

Let us take the example of an individual below the age of 60 whose net taxable income for the financial year 2014-15 aggregates to 1.02 crore. In this case, the tax payable (excluding cess) would be 28,85,000 and surcharge would be 2,88,500 (10% of tax payable). However, as per the marginal relief, surcharge should not be more than the actual income above the 1 crore. So, in this case, the net income above 1 crore would be 1.4 lakh (2 lakh, which is the income crossing the 1 crore mark, less 30% income tax). Therefore, the actual surcharge would be 1.4 lakh. As a result, the net tax liability would be 31,15,750 [Total tax + surcharge + education cess (2%) + secondary and higher education cess (1%)]. This means 28,85,000 + 1,40,000 + 60,500 + 30,250.

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