Marginal Relief required for those whose Income Exceeds Marginally

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Marginal Relief from Surcharge on Income Tax

The notion of marginal relief is intended to give a taxpayer with relief from surcharge levy if total income surpasses slightly more than Rs. 50 lakhs, Rs. 1 crore, or Rs. 10 crores, as the case may be. Thus, in the case of taxpayers (Individuals/HUF/AOP/BOI/artificial juridical person) with total income exceeding Rs. 50 lakhs, marginal relief shall be available in such a way that the net amount payable as Income Tax and surcharge does not exceed the total amount payable as income-tax on a total income exceeding Rs. 50 lakhs by more than the amount of income that exceeds Rs. 50 lakhs. In this Article we’ll discuss Marginal Relief from Surcharge on Income Tax. 

Table of Content

Key Abstract

The Income Tax Act, 1961 provides marginal relief to people whose taxable income exceeds the threshold limit after which a surcharge is required but whose net income over the threshold is less than the surcharge.

For example, if you are a person and your total taxable income is 51 lakh in a fiscal year, you must pay a 10% surcharge on taxable income between 50 lakh and 1 crore. After deducting everything, you’ll wind up paying ₹13, 42,500 in taxes and a surcharge of ₹1, 34,250. The surcharge amount, however, is more than the difference between your taxable income and the margin that places you in the higher tax bracket which is ₹1 lakh (₹51 lakh minus ₹50 lakh).

The surcharge is subject to marginal relief to compensate for this anomaly. In this example, the net income over 50 lakh is 70,000 (one lakh, which is the income beyond 50 lakh, minus 30% income tax). As a result, the real surcharge would be 70,000, and the total tax due would be Rupees 14, 12,500 (13, 42,500 + 70,000), plus a 4% education and health cess of 56,500. As a result, the net Income Tax payable is 14, 12,500 plus 56,500, or 14, 69,000.

Marginal relief for individuals

Certain taxpayers are eligible for marginal relief up to the amount of the difference between the excess tax payable (including surcharge) on income above Rs.50 lakhs and the amount of income exceeding Rs.50 lakhs.

Case 1 :Where the total income* exceeds Rs.50 lakhs but does not exceed Rs.1 crore, taxpayers must pay a 10% surcharge on the Income Tax assessed.

*In this case, total income refers to net income after all potential deductions or taxable income. (You may calculate your taxes here.)

According to the Income-tax regulations, some taxpayers would receive marginal relief up to the amount of the difference between the excess tax payable (including surcharge) on income exceeding Rs.50 lakhs and the amount of income exceeding Rs.50 lakhs.

Assume a person earns Rs.51 lakhs in the fiscal year 2020-21.

  • He will have to pay taxes plus a 10% surcharge on the calculated tax, making the total tax payable Rs. 14, 76,750.
  • However, if he had just earned Rs.50 lakhs, his tax payment would have been Rs.13, 12,500 (excluding cess).
  • Isn’t this unjust to the individual? He would end up paying Rs.1, 64,250 in Income Tax for earning an extra Rs.1, 000,000. To avoid any such excess tax, the individual’s tax burden should be decreased.
  • Individuals would get marginal relief equal to the difference between the excess tax owed on higher income (Rs.14,76,750 minus Rs.13,12,500 = Rs.1,64,250) and the amount of income that surpasses Rs. 50 Lakhs (Rs.51,00,000 minus Rs.50,00,000 = Rs.1,000,000).
  • The marginal relief amount is Rs.64, 250 (Rs.1, 64,250 minus Rs.1, 00,000).
  • As a result, the Income Tax liability on Rs. 51, 00,000 will be Rs.14, 12,500.

Case 2 : Where total revenue exceeds Rs.1 crore but falls short of Rs.2 crore

  • The Income Tax payable will be subject to a 15% surcharge.
  • The taxpayer will receive marginal relief up to the difference between the excess tax payments (including surcharge) on income exceeding Rs.1 crore and the amount of income that exceeds Rs.1 crore.
  • If an individual’s total income is Rs.1.01 crore in any fiscal year, he must pay tax plus a 15% surcharge on the tax computed, resulting in a total tax due of Rs.32, 68,875.
  • However, if he had merely made Rs.1 crore, the tax payable would have been Rs.30, 93,750. He would end up paying Rs.1, 75,125 in Income Tax for earning an extra Rs.1, 000,000.
  • As a result, the individual will receive a marginal relief equal to the difference between the excess tax owed on higher income (Rs.1,75,125) and the amount of income that exceeds Rs.1 crore (Rs.1,75,125) (Rs. 1,00,000, in this case).
  • The marginal relief amount is Rs.75, 125 (Rs.1, 75,125 minus Rs.1, 00,000).

Marginal relief for companies

Marginal relief would be offered only to companies with a total income of more than Rs.1 crore but less than Rs.10 crores, i.e., the Income Tax payable (including surcharge) on the higher income should not be greater than the amount of income that exceeds Rs.1 crore.

Case 1 : If a domestic company’s total revenue exceeds Rs.1 crore but does not exceed Rs.10 crore, a 7% surcharge will be applied on the Income Tax payment.

Similarly, international enterprises with total income more than Rs.1 crore but less than Rs.10 crore would face a 2% surcharge on Income Tax payments.

Marginal relief would be offered only to companies with a total income of more than Rs.1 crore but less than Rs.10 crores, i.e., the Income Tax payable (including surcharge) on the higher income should not be greater than the amount of income that exceeds Rs.1 crore.

Case 2 : If a domestic company’s total income exceeds Rs.10 crores, a surcharge of 12% will be charged on the Income Tax payment.

Similarly, foreign companies with total income exceeding Rs.10 crores would face a 5% surcharge on Income Tax payments.

Only companies with a total income of more than Rs.10 crores will be eligible for marginal relief, which means that the Income Tax due (including surcharge) on the higher income cannot exceed the Income Tax payable on Rs.10 crores by more than the amount of income that exceeds Rs.10 crores.

Marginal Relief for Firms

If the total income exceeds Rs.1 crore, a surcharge of 12% will be charged on the Income Tax payable. A marginal relief would be offered to such taxpayers who have a total income of more than Rs.1 crore, which means that the Income Tax payable (including surcharge) on the higher income should not be more than the amount of income that exceeds Rs.1 crore. To put it simply, if a company’s total income is Rs.1.01 crores, it must pay Income Tax plus a surcharge of 12% on the tax computed, making the total tax due Rs.32,24,000. However, if the entire revenue had been merely Rs. 1 crore, the tax due would have been Rs.31, 20,000. It would end up paying Rs.14, 000 in Income Tax for generating an extra Rs.100, 000.

As a result, the firm will receive a marginal relief equal to the difference between the excess tax owed on higher income, i.e. (Rs.1, 04,000), and the amount of income that exceeds Rs.1 crore, i.e. (Rs.1, 00,000, in this case). The marginal relief amount is Rs.4, 000 (Rs.1, 04,000 minus Rs.1, 00,000).

Marginal Relief required for those whose Income Exceeds Marginally

Individuals (other than designated individuals) and HUFs pay Income Tax at a rate of 5% on income between Rs. 2,50,000 and Rs. 5,00,000, a rate of 20% on income between Rs. 5,00,001 and Rs. 10,00,000, and a rate of 30% on income over Rs. 10,00,000. 

Though the tax on Rs. 5,00,000 is Rs. 12,500, section 87A provides a refund of (deduction from) 100 percent of the tax on income up to Rs. 5,00,000, making the tax due NIL. However, after the income reaches the Rs. 5,00,000 threshold limit, the Income Tax due exceeds the income that exceeds Rs. 5,00,000 since the Income Tax rate begins at Rs. 2,50,000. For example, if you earn Rs. 5, 10,000, the Income Tax payable is Rs.14, 500.

It does not appear to be fair and equitable since the Income Tax payment on income that exceeds the income on which no tax is payable (i.e. Rs. 5,00,000) is greater than the Income Tax payable on income that exceeds the non-taxable amount of Rs. 5,00,000 owing to rebate. This is contrary to legal and natural justice norms.

Marginal Relief would be offered to limit the amount of tax payable on income exceeding Rs. 500,000. The tax due surpasses the income that exceeds the non-taxable limit of Rs. 5,15,620 up to the taxable income of Rs. 5,15,620. As a result, marginal relief of restricting the tax payment to the amount that surpasses Rs. 5, 00,000 would be offered for those taxpayers whose income is up to Rs. 5, 15,620.

Endnote

As a result, the notion of Marginal Relief deals with the main principle and goal that the rise in Income Tax should not be greater than the amount raised in a taxpayer’s income. The effect of marginal relief tends to minimise a taxpayer’s Income Tax burden. Individuals, HUFs, firms, domestic or foreign companies all benefit from the provision of marginal relief.

Connect to Legal Window if you are facing any issue in computing Marginal Relief. Our experts will guide you through the process.

 

CA Pulkit Goyal, is a fellow member of the Institute of Chartered Accountants of India (ICAI) having 10 years of experience in the profession of Chartered Accountancy and thorough understanding of the corporate as well as non-corporate entities taxation system. His core area of practice is foreign company taxation which has given him an edge in analytical thinking & executing assignments with a unique perspective. He has worked as a consultant with professionally managed corporates. He has experience of writing in different areas and keep at pace with the latest changes and analyze the different implications of various provisions of the act.

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