Lower effective tax rate of 39% instead of 42.74% in top bracket of new tax regime; here’s how marginal relief works

Individuals having income(s) above Rs 50 lakh have to pay an additional tax which is known as ‘surcharge’. However, the surcharge rates are structured under specified income slabs. In Budget 2023, the highest surcharge rate applicable to those individuals who earn more than Rs 5 crore was reduced from 37% to 25% provided these individuals chose the new tax regime.

“Individuals earning higher income are charged an additional charge above tax which is known as a surcharge. It’s worth noting that in Budget 2023, the highest surcharge rate of 37% was reduced to 25% under the new tax regime, effective from 1st April 2023. This move brought down the effective tax rate from 42.74% to 39%,” says Abhishek Soni, co-founder, Tax2Win, a tax filing assistance company.

What are the slabs of surcharge?

The surcharge rates under both old and new tax regimes are structured as follows:

Source: Akhil Chandna, Partner, Grant Thornton Bharat

How is the surcharge calculated and levied?

Soni shares an example of how to calculate a surcharge:

Example: The taxable income of a salaried individual is Rs 53 lakh. In this case, since the taxable income of the individual is more than Rs 50 lakh but less than Rs 1 crore, he is liable to pay a surcharge at a rate of 10%. The income tax on Rs 53 lakh income is calculated as per the normal slab rate under the new tax regime, which amounts to Rs 12,75,000. The rate of surcharge that is applicable in this case is 10%, hence the amount of surcharge would be 10% of Rs 12,75,000 which is Rs 1,27,500. Thus, income tax payable (inclusive of surcharge would be Rs 14,02,500 (Rs 12,75,000 + Rs 1,27,500).

When can you get marginal relief on the surcharge?

Those taxpayers have an income above Rs 50 lakh but due to the addition of surcharge, income tax is being applied disproportionately on higher incomes. “The provisions relating to Marginal Relief ensure that the tax liability doesn’t escalate disproportionately due to the surcharge applied on higher incomes,” says Akhil Chandna, Partner, Grant Thornton Bharat, a tax and business consulting group.

Marginal relief can only be taken when your tax payable amount is higher than your marginal gain in income.

For example: Suppose an individual’s net taxable income is Rs 51 lakh. At this income level, a surcharge rate of 10% is to be applied and it comes to Rs 1,34,250. So the total tax including the surcharge would come to Rs 13,42,500. “In this scenario, the surcharge (Rs 1,34,250) surpasses the additional income above Rs 50 lakh (Rs 1,00,000). This is where marginal relief comes into play,” says Soni from Tax2Win.

Which individuals are eligible for marginal relief?

Marginal relief on surcharge must not be confused with marginal relief on income tax which is given to those who have net taxable income slightly more than Rs 7 lakh and chose the new tax regime. In this article, we are talking about marginal relief on surcharge.

“Individual taxpayers with taxable income slightly above Rs 50 lakh/ 1 crore/ 2 crores/ 5 crore are eligible for marginal relief for surcharge amount. Further, marginal relief for income tax amount is also available in case of New Tax Regime if the income is slightly more than Rs 7 lakhs,” says Chandna.

How is marginal relief calculated?

Let’s take another example for individual Mr A, who has a net taxable income of Rs 51 lakh for FY 2023-24. According to Chandna, “The total tax liability is Rs 14,76,750 (under the old tax regime) inclusive of a surcharge of 10%.”

He further explains how marginal relief is calculated:

If the threshold of Rs 50 lakhs to trigger surcharge is not met and Mr A had earned taxable income of Rs 50 lakh, his tax liability would have been Rs 13,12,500 (excluding cess). This will be unfair for the individual to pay an additional income tax of Rs 1,64,250 on incremental income of Rs 1,00,000. The individual’s tax liability should be reduced to avoid any such disproportionate tax payable.

“Hence, by applying the provisions of Marginal relief, Mr A will get a relief of the differential tax amount between the excess tax payable on incremental income i.e. 1,64,250, and the amount of income that exceeds Rs 50 lakh i.e. Rs 1,00,000. The marginal relief would be Rs 64,250 (Rs 1,64,250 – Rs 1,00,000). Hence, the net tax liability on total taxable income of Rs 51 lakh (post marginal relief) would be Rs 14,12,500 (excluding cess),” says Chandna.

People with incomes over Rs 50 lakh are required to pay an extra tax known as a ‘surcharge’. However, the surcharge rates are based on specific income brackets. In Budget 2023, the highest surcharge rate for individuals earning more than Rs 5 crore was reduced from 37% to 25% if they opted for the new tax system.

“Those with higher incomes are subject to an additional surcharge on top of their regular taxes. It is important to note that in Budget 2023, the highest surcharge rate was decreased from 37% to 25% under the new tax regime starting from April 1, 2023. This change lowered the effective tax rate from 42.74% to 39%,” explained Abhishek Soni, co-founder of Tax2Win, a tax filing assistance company.

What are the surcharge slabs?

The surcharge rates under both the old and new tax regimes are structured as follows:

Source: Akhil Chandna, Partner, Grant Thornton Bharat

How is the surcharge calculated and applied?

Soni provides an example of calculating a surcharge:

Example: If a salaried individual has a taxable income of Rs 53 lakh, they would be subject to a surcharge of 10% as their income is more than Rs 50 lakh but less than Rs 1 crore. The income tax on Rs 53 lakh would be Rs 12,75,000 according to the new tax regime. With a surcharge rate of 10%, the surcharge amount would be 10% of Rs 12,75,000 which equals Rs 1,27,500. Therefore, the total income tax payable including the surcharge would be Rs 14,02,500 (Rs 12,75,000 + Rs 1,27,500).

When can you receive marginal relief on the surcharge?

For individuals with incomes above Rs 50 lakh, if the surcharge results in disproportionately high income tax on higher incomes, marginal relief can be applied to ensure fair tax liability. “Marginal Relief provisions prevent an unfair increase in tax liability due to surcharges on higher incomes,” stated Akhil Chandna, Partner at Grant Thornton Bharat, a tax and business consulting firm.

Marginal relief can only be claimed when the tax payable amount exceeds the marginal gain in income.

For instance: If an individual’s net taxable income is Rs 51 lakh, a surcharge rate of 10% would be applicable, resulting in Rs 1,34,250 surcharge. The total tax including the surcharge would be Rs 13,42,500. “In this case, the surcharge amount (Rs 1,34,250) is higher than the additional income above Rs 50 lakh (Rs 1,00,000). This is where marginal relief comes into play,” as explained by Soni from Tax2Win.

Which individuals qualify for marginal relief?

Marginal relief on surcharge should not be confused with marginal relief on income tax, which is granted to those with a net taxable income slightly higher than Rs 7 lakh who choose the new tax regime. Here, we are discussing marginal relief on surcharge.

“Individual taxpayers with taxable incomes slightly above Rs 50 lakh/ 1 crore/ 2 crores/ 5 crores are eligible for surcharge marginal relief. Additionally, marginal relief for income tax is available in the case of the New Tax Regime for incomes slightly above Rs 7 lakhs,” informed Chandna.

How is marginal relief calculated?

Let’s consider another example of individual Mr. A, who has a net taxable income of Rs 51 lakh for the fiscal year 2023-24. According to Chandna, “The total tax liability under the old tax regime, including a 10% surcharge, would be Rs 14,76,750.”

Chandna elaborates on how marginal relief is computed:

If the Rs 50 lakh threshold to trigger a surcharge is not met, and Mr. A’s taxable income was Rs 50 lakh, the tax liability would be Rs 13,12,500 (excluding cess). In such a case, it would be unfair for the individual to pay an additional income tax of Rs 1,64,250 on an incremental income of Rs 1,00,000. To avoid such disproportionate tax payment, the individual’s tax liability should be reduced.

“Therefore, by applying Marginal Relief provisions, Mr. A would receive relief equal to the differential tax amount between the excess tax payable on incremental income (Rs 1,64,250) and the amount of income exceeding Rs 50 lakh (Rs 1,00,000). The marginal relief would amount to Rs 64,250 (Rs 1,64,250 – Rs 1,00,000). Hence, the net tax liability on a total taxable income of Rs 51 lakh (after marginal relief) would be Rs 14,12,500 (excluding cess),” explained Chandna.