By definition surcharge is an additional charge or tax levied on an existing tax. Unlike a cess,
which is meant to raise revenue for a temporary need, surcharge is usually permanent in
nature. It is levied as a percentage on the income tax payable as per normal rates. If there is a scenario where in no tax is due for a financial year, then no surcharge is levied.
The revenue earned via surcharge is solely retained by the Centre and, unlike other tax revenues, is not shared with States.
Collections from surcharge flow into the Consolidated Fund of India.
Currently, high networth individuals and companies are liable to pay a surcharge on their tax outgo.
Individuals earning a taxable income of over ₹1 crore have to shell out a surcharge
amounting to 15 per cent of their tax outgo. So in summary, if your taxable income is ₹1.2 crore, your income tax payable works out to ₹34.25 lakh. The 15 per cent surcharge will be computed on this amount, at ₹5.13 lakh. Thus, the total tax payable is ₹39.38 lakh without including cess.
Partnership firms earning over ₹1 crore in taxable income pay a surcharge of 12 per cent.
Domestic firms earning ₹1 crore to ₹10 crore pay a 7 per cent surcharge and those earning
over ₹10 crore pay 12 per cent.
Many confuse the tax rate of surcharge as to be payable on the total income of an individual,
but it is an additional tax which is levied on the amount of tax above INR 1 Cr.
Earlier, surcharge, in case of Individual/ HUF/ BOI/ AOP/ Artificial Juridical Person, was
chargeable at the rate of 10% on the tax if the total income of the assessee exceeded 50 lakhs
and 15% on tax if the total income exceeded 1 crore. Now, it is proposed to enhance the
above rates by introducing slabs (based on total income) for levy of surcharge. For the
aforesaid category of person, surcharge is proposed to be levied at the rate of 25% having a
total income exceeding two crore rupees but not exceeding five crore rupees and to be levied
at the rate of 37% having a total income exceeding five crore rupees. Surcharge for other
persons remains unchanged. Marginal relief has been provided in all cases where surcharge is
proposed to be levied. Health and Education Cess remains same at the rate of 4% of the total
of Income Tax and Surcharge. No marginal relief is available in respect of such case. Impact
of the proposed increase in the rate of Surcharge on effective rate of tax (including health and
As per the recent changes the effective tax rate ( After taking into consideration surcharge )
for an indivual having an Income above INR 2 Cr but below INR 5 Cr is 39% i.e 3.12%
effective hike with respect to the previous effective rates of 35.88% and an indivual having
an income above INR 5 Cr is 42.74% i.e an increase in 6.86% from the previous rate of
Individuals are subject to highest levy of surcharge compared to other tax payers. So if your
total taxable income exceeds ₹1 crore, you must brace for much higher tax outgo. The
surcharg levied is not eligible for any deductions or exemptions. If you are a high income
earner, you must keep surcharge in mind when jumping jobs or negotiating for a pay rise. The
moment your income exceeds the magic number of ₹1 crore, your tax outgo will shoot up.
Considering the heavy burden, tax laws provide something called ‘marginal relief’ to super
rich taxpayers. This provision is designed to make sure that the increase in income tax due to
surcharge is not higher than the actual increase in income. In such cases, the surcharge is
restricted to the increased income.
To claim the marginal relief, your incremental tax should be greater than the income earned
beyond ₹1 crore. For instance, if your income is ₹1,01,00,000, your tax would be ₹28,55,000.
The surcharge on this works out to ₹4,28,250, taking your total outgo to ₹32,83,250. Here,
the extra tax (₹4.28 lakh) is greater than the extra income earned beyond ₹1 crore (₹1 lakh).
Once you claim marginal relief, your surcharge will be restricted to ₹1 lakh.
Our opinion is that levying surcharge on the wealthy is fine. But the concept mustn’t be stretched so far that the super-rich find smart ways to skip taxes altogether and it looks like the recent budget has stretched this a little too far and should consider bringing down the effective rates.
- Darshan Sanghvi
Busness Analyst & Valuation Expert KAPSO Business Services