(Photo: Mint)
(Photo: Mint)

What is marginal relief and how is it calculated?

  • The surcharge levied is subject to marginal relief to ensure the payable amount does not exceed the income which is in excess of the threshold
  • Individuals with a total taxable income between 50 lakh and 1 cr will pay a surcharge of 10% and those with an income between 1 cr and 2 cr will pay 15%

Finance minister Nirmala Sitharaman, in her budget speech last week, increased the surcharge levied on individuals whose taxable income is over 2 crore per annum. A surcharge is the tax charged on the total tax payable and the revenue generated from this goes directly to the central government.

Previously, all taxpayers earning more than 2 crore were paying a surcharge of 15%. This year’s budget increased the surcharge to 25% for those earning between 2 crore and 5 crore and 37% for those with an income above 5 crore.

There are two other income slabs on which surcharge is applicable. Individuals with a total taxable income between 50 lakh and 1 crore will pay a surcharge of 10% and those with an income between 1 crore and 2 crore will pay 15%.

However, the actual surcharge levied is subject to marginal relief to ensure the payable amount does not exceed the income which is in excess of the threshold. But what exactly is marginal relief and how is it calculated?

Marginal relief

According to the Income-tax Act, 1961, a marginal relief is given to individuals whose taxable income is beyond the threshold limit after which surcharge is payable, but the net income above the threshold is less than the surcharge.

For example, if you’re an individual and your total taxable income is 51 lakh in a financial year, you will be required to pay a 10% surcharge applicable on taxable income between 50 lakh and 1 crore. After taking into account all the deductions, you’ll end up paying 13,42,500 as tax and the surcharge would be 1,34,250. However, the surcharge amount here is more than the difference between your taxable income and the margin which puts you in the higher tax slab, which is 1 lakh ( 51 lakh minus 50 lakh).

To adjust this anomaly, the surcharge is subject to marginal relief. In this case, the net income over 50 lakh is 70,000 ( 1 lakh which is the income crossing 50 lakh mark, less 30% income tax). Hence, the actual surcharge would be 70,000 and the net tax liability would be 14,12,500 ( 13,42,500 plus 70,000) plus an additional education and health cess at 4% equal to 56,500. Therefore, the net income tax payable would be 14,12,500 plus 56,500 or 14,69,000.

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