India has a well-structured tax system. The government's largest source of revenue is taxes, and these funds are used for various projects and purposes that support the country's development. Income Tax Act 1961 states that any assessee whose income exceeds the maximum exempt amount is subject to income tax. Annually, the Union Budget sets out the tax structure and rates.
The total income is calculated using various sources such as house property, salaries, capital gains, business and profession and house property. The assesses can be classified as individuals, Hindu Undivided Family, AOP, local authority, Body of Individuals (BOI) firm or the artificial judiciary.
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Marginal relief is a way to reduce the surcharge burden for many. When income exceeds a certain limit, the surcharge applies. Even though their payments are below the marginal surcharge, taxpayers still pay a large surcharge. The concept of marginal relief serves to relieve taxpayers from surcharges in such cases.
What is Surcharge?
A surcharge is a fee, charge, or tax that is added to the cost of a product or service after the initial price has been quoted. Surcharges are frequently added to existing taxes and are not included in the advertised price of the good or service. The fee could indicate a municipality's need to raise funds for additional services, a boost to cover the expense of rising commodity prices, such as a gasoline levy, or an additional fee on your cellular bill for access to emergency services.
What is Surcharge Meaning in Income Tax?
Let's understand the surcharge on income tax meaning. If income exceeds a certain level, the government may impose additional taxes on wealthy people. We call this additional tax 'Surcharge'. Surcharges or additional charges are essentially taxes that are added to taxes. It is calculated based on the tax payable and not income earned. A 10% surcharge on a 30% tax rate effectively increases the total tax rate by 33%. A tax of 30% adds to an income of ₹100. The total tax payable would then be ₹30, and a surcharge of 10% adds on to ₹30. The effective payment would be ₹30 + ₹3 = ₹33.
Surcharge on Income Tax
The surcharge is an additional tax. The surcharge is added to the income tax if the assessed person's income exceeds the income limit in a given financial year. The surcharge is charged on the tax payable and not the income.
The surcharge will be charged at different income tax rates based on the taxpayer's tax status. Surcharges are generally between 2% and 37%. In 2013, the Finance Act introduced the concept of a surcharge on income taxes.
Let's say your income exceeds your financial year limit. A surcharge of 10% will be applied, and you will have to pay ₹5,000 tax. In this example, your income tax will be 10% of ₹5,000, i.e. ₹500.
Surcharge for Individuals
Individuals were initially subject to a 10% surcharge for capital gains. In 2015, the surcharge increased to 12% and 15% in 2016. The 2019 budget has increased rates. Individuals are subject to a surcharge if their net income exceeds ₹50 lakhs in a given financial year, as per the 2017 budget. Individuals and companies have different rates of income surcharge tax.
Health and Education Cess - Similar concepts are the surcharge and cess. Cess is a tax levied on the tax payable, and cess is not like a surcharge, and it applies to all taxpayers of the country, regardless of their tax bracket.
It is a tax that the government imposes on taxpayers. It uses the money to pay for specific purposes. The cess collected must be used for the exact purpose it was created. Health and education cess are for fulfiling the needs of the poor.
The current rate for education and health cess is 4%. The income limit is what makes surcharge and cess different. Surcharges are applied to net income that exceeds the limit, and cess applies to all taxpayers.
What Does Marginal Relief Mean?
The 1961 Income tax Act provides marginal relief to individuals whose income exceeds the threshold after surcharges are payable. However, the surcharge does not apply to net income above the threshold.
Marginal relief is available from the surcharge for individuals, AOP, HUF, BOI or artificial judicial person in the following manner:
- Suppose your net income exceeds ₹1 crore but doesn't exceed ₹2 crores. In that case, marginal relief shall apply from surcharge in such an arrangement that the total amount as income tax and surcharge on total income shall not exceed ₹1 crore or more than the income exceeding ₹1 crore.
- If your net income exceeds ₹50 lakhs but does not exceed ₹1 crore, the amount payable in income tax and surcharge must not exceed ₹50 lakhs for total income.
- If your net income exceeds ₹5 crores, marginal relief from the surcharge will be provided for those whose net income exceeds ₹5 crores. The surcharge and income tax shall be paid so that the surcharge and income tax amount does not exceed the total income tax of ₹5 crores, plus the income exceeding ₹5 crores.
- Suppose your net income is between ₹2-5 crores. In that case, you'll get marginal relief from the surcharge. The surcharge and payable income tax amount shall not exceed the entire amount payable as income tax on your full income of ₹2 crores by over the income amount surpasses ₹2 crores.
Marginal relief for firms/local authorities, Co-operative Society or LLP is available in the following manner:
Marginal relief will be granted to taxpayers with a total income exceeding ₹1 crore. The income tax due (including surcharge) should not exceed ₹1 crore.
Companies (Domestic/Foreign) Can Obtain Marginal Relief in the Following Way:
- Companies with a total income exceeding ₹10 million will receive marginal relief. This means that the income tax due (including a surcharge on the higher income) should not exceed ₹10 lakhs.
- Companies with a total income exceeding ₹1 crore but below ₹10 crores will receive marginal relief. Higher-income income tax due (including surcharge) must not exceed ₹1 crore.
What is the Surcharge Calculated?
Calculating the Gross Total Income (or GTI) is the first step in calculating the surcharge. GTI is the sum of five income sources. According to the 1961 Income Tax Act, deductions are made from the GTI. The net tidal amount is the remainder. The net total income surcharge levied at different rates for individuals and businesses is based on the net income. Here are some examples to help you understand the concept better.
Individual Surcharge Rates
Your net income is ₹1.10 Cr, and the income tax payable is ₹31.12 lakhs. The surcharge of 15% will be added to your net income once it has exceeded ₹1 Cr. ₹4.67 lakhs, which is 15% of your current payable tax, will be added to your payable tax of ₹31.12 lakhs, increasing your tax liability to ₹35.79 lakhs.
Surcharge for Foreign Companies - Let's say that the net income of a foreign business is ₹1.10 cr and that the current payable income is ₹44 lakhs. The specified rates will apply to the ₹44 lakhs payable tax. Your existing tax payable will experience a surge of ₹88,000, making your new tax liability ₹44.88 lakhs.
Surcharge for Domestic Companies - Let's say that the net income of a domestic business is ₹1.10 cr and that the income tax payable is ₹33 lakhs. An income tax surcharge rate will be applied to the company at 7%. Thus, the company will pay 7% of the ₹33 lakhs payable income tax. ₹ 2.31 lakhs will increase the existing tax liability. Therefore, the new tax liability for the company will be ₹35.31 lakhs.
We hope you cleared your doubts on - "What is the surcharge in income tax?"
Understanding the taxation system can be pretty tough, but understanding the surcharge under income tax is just a normal calculation. If you know a few arithmetics, understanding the sense of this taxation system and calculation won't pose any challenge to you. There are many tax-saving ways, but make sure you don't start following any shady tax-saving techniques, following somebody's suggestions. Take advice only from professionals.
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