Surcharge on Income Tax

Surcharge is a tax on tax. It is levied on the tax payable, and not on the income generated. For example, if you have an income of Rs 100 on which the tax is Rs 30, the surcharge would be 10% of Rs 30 or Rs 3. In India, a surcharge of 10% is levied if an individual’s income is more than Rs. 50 Lakhs and a surcharge of 15% is levied if the individual’s income is more than Rs 1 crore. In case of companies, it is levied if the income is more than Rs. 1 Crore.

Surcharge is a tax on tax. It is levied on the tax payable, and not on the income generated. For example, if you have an income of Rs 100 on which the tax is Rs 30, the surcharge would be 10% of Rs 30 or Rs 3. In India, a surcharge of 10% is levied if an individual’s income is more than Rs. 50 Lakhs and a surcharge of 15% is levied if the individual’s income is more than Rs 1 crore. In case of companies, it is levied if the income is more than Rs. 1 Crore.

Introduction of Surcharge for Individuals

Initially, the surcharge was levied on individuals with a total income more than Rs 1 crore at the rate of 10%. This rate was increased to 12% in the 2015 Budget and further to 15% in the 2016 Budget. The 2017 imposed a surcharge on those with an income above 50 lakh. Companies with an income above 1 crore are also liable to pay surcharge.

Health and Education Cess

In addition to surcharge, all individuals who are liable  to pay income tax also have to pay health and education cess on the tax payable. Health and Education Cess is payable at a rate of 4%. It is levied on the tax payable and not on the underlying income. For example if an income of Rs 100 attracts a tax of Rs 30, the health and education cess would be 4% of Rs 30. This would come to Rs 1.2. Unlike surcharge, there are no thresholds for health and education cess – it is payable by all persons liable to pay income tax.

Current rates of Surcharge

Following are the thresholds and the rates of surcharge applicable in case of various assesses.

• Individuals, Hindu Undivided Family (HUFs), Body of Individuals (BOI), Association of Persons (AOP) and Artificial Judicial Person (AJP)

• Domestic Company – the following are the surcharge rates that are applicable in case domestic companies:

• Foreign Company – As per Income Tax Act, 1961, Foreign company refers to a company whose control and management are situated wholly outside of India. Following surcharge rates are applicable in case foreign company:

The rate of surcharge applicable in case of foreign companies is low as compared to that applicable to domestic companies and individuals because foreign companies are already taxed at a higher rate as compared to other assessees.

Calculation of Surcharge

Incomes from five separate heads are totaled to arrive at the Gross Total Income or GTI. This GTI is then reduced by various deductions under Chapter VI A to obtain the Net Total Income. This is the income on which tax is calculated. The rate of tax depends on the whether the assessee is an individual, firm, domestic company, etc. Once the tax is calculated, rate of surcharge is applied on this amount of tax. Hence, surcharge is calculated on the total Income Tax and not on the income itself. The amount of income is used just to determine the applicability of the surcharge. After computation of total income, surcharge is calculated on the income tax and not income.

To see the applicability and calculation of surcharge in case of individuals, please find below the examples of an individual assessee:

1. Taxable Income is Rs. 49 Lakhs: Suppose an individual has a taxable income of Rs. 49 Lakhs, in such case since the total taxable income is less than the minimum threshold limit of Rs. 50 Lakhs, surcharge is not applicable and hence the tax payable will be taxable as per the slab rates applicable.
2. Taxable Income is Rs. 53 Lakhs: In this case, since the taxable income of the individual is more than Rs. 50 Lakhs but less than Rs. 1 crore, he is liable to pay surcharge @10%. The income tax on Rs. 53 Lakhs is to be calculated as per the normal slab rate, which amounts to Rs. 14,02,500. The rate of surcharge that is applicable in this case is 10 %, hence amount of surcharge would be 10% of Rs. 14,02,500 which is 1,40,250. Thus income tax payable (inclusive of surcharge would be Rs. 15,42,750 (Rs. 14,02,500 + Rs. 1,40,250).
3. Taxable Income is Rs. 110 Lakhs: In this case, since the taxable income of the individual is more than 1 crore, he is liable to pay surcharge @15%. The income tax on Rs. 110 Lakhs is to be calculated as per normal slab rate, which amounts to Rs. 31,12,500. The rate of surcharge that is applicable in this case will be 15 %, hence amount of surcharge would be 15% of 31,12,500 which is Rs. 4,66,875. Thus income tax payable (inclusive of surcharge would be Rs. 35,79,375/- (Rs. 31,12,500 + Rs. 4,66,875).

To see the applicability and calculation of surcharge in case of a domestic company, please find below the examples of tax payable including surcharge in case of a domestic company assessee:

1. Taxable Income is Rs. 95 Lakhs: Suppose a domestic company has a taxable income of Rs. 95 Lakhs taxable at the rate of 30%, in such a case, since the total taxable income is less than the minimum threshold limit of Rs. 1 crore, surcharge is not applicable and hence the company will be taxable as per applicable tax rates
2. Taxable Income is Rs. 1.10 crores: Suppose a domestic company has a taxable income of Rs. 1.10 crore taxable at the rate of 30%, in this case, since the taxable income is more than Rs. 1 crores but less than Rs. 10 crores, the company is liable to pay surcharge at 7% on the total tax. The income tax on Rs. 1.10 crore is to be calculated as per applicable rate i.e. 30%, which amounts to Rs. 33,00,000. The rate of surcharge that is applicable in this case is 7 %, hence amount of surcharge would be 7% of 33,00,000 which is 2,31,000. Thus total tax payable inclusive of surcharge would be Rs. 35,31,000 (Rs. 33,00,000 + Rs. 2,31,000).
3. Taxable Income is Rs. 15 crores: In this case, since the taxable income is more than 10 crore, it is liable to pay surcharge @12%. The income tax on Rs. 15 crore is to be calculated as per normal tax rate of 30%, which amounts to Rs 4.5 crores. The rate of surcharge that is applicable in this case will be 12 %, hence amount of surcharge would be 12% of 4.5 crores which is 0.54 crores. Thus income tax payable (inclusive of surcharge) would be Rs. 5.04 crores (4.5 crores + 0.54 crores).

To see the applicability and calculation of surcharge in case of a foreign company, please find below the examples:

1. Taxable Income is Rs. 95 Lakhs: Suppose a foreign company has a taxable income of Rs. 95 Lakhs. This is taxable at a rate of 40%. In such a case, since the total taxable income is less than the minimum threshold limit of Rs. 100 Lakhs, surcharge is not applicable. The tax payable will be 40% of Rs 95  lakh which is Rs 38,00,000.
2. Taxable Income is Rs. 1.10 Crores: Suppose a foreign company has a taxable income of Rs. 1.1 crores taxable at the rate of 40%, in this case, since the taxable income is more than Rs. 1 crore but less than Rs. 10 crore, it is liable to pay surcharge @2%. The income tax on Rs. 1.1 crores is to be calculated as per applicable rate i.e. 40%, which amounts to Rs. 44,00,000/-. The rate of surcharge that is applicable in this case is 2%, hence amount of surcharge would be 2% of 44,00,000 which is 88,000/-. Thus income tax payable (inclusive of surcharge would be Rs. 44,88,000/- (44,00,000 + 88,000).
3. Taxable Income is Rs. 15 crores: In this case, since the taxable income is more than 10 crore, the company is liable to pay surcharge @5%. The income tax on Rs. 15 crores is to be calculated as per normal tax rate of 40%, which amounts to Rs. 6 crores. The rate of surcharge that is applicable in this case will be 5%, hence amount of surcharge would be 5% on Rs. 6 crores which is Rs.30 lakh. Thus the total income tax payable (inclusive of surcharge) would be Rs. 6.3 crores (Rs. 6 crore + Rs. 30 lakh crores).

The Concept of Marginal Relief

Surcharge is levied if the total income of the assessee exceeds the minimum amount prescribed and hence surcharge is payable by all the individuals or companies whose total income exceeds Rs. 50 Lakhs or Rs. 1 crore respectively. However in certain cases, assesses might become liable to pay surcharge even in case the income exceeds the limit marginally. To grant relief to such assesses, concept of marginal relief is introduced. As the name suggests, marginal relief is the relief granted to the taxpayer from the levy of surcharge if he is liable to surcharge due to the reason that his income marginally exceeds the limits prescribed.

The purpose of marginal relief is to ensure that the amount of tax payable including surcharge does not exceed the amount of income which exceeds the prescribed threshold. For example, if the income of the individual is more than Rs. 50 Lakhs, marginal relief will be applicable. This will ensure that income tax payable (inclusive of surcharge) on Rs. 50 Lakhs does not exceed the amount by which the individual’s income exceeds Rs. 50 Lakhs.

The same can be understood with the help of following example in which income of an individual is Rs. 50.1 lakhs:

Since the income of the individual is more than Rs. 50 Lakhs but less than Rs. 1 crores, the individual will be liable for surcharge @ 10%. Calculation of tax liability inclusive of surcharge is as follows:

In case, the tax payable if the amount of income was Rs. 50 Lakhs would be Rs. 13,12,500 (before surcharge). Thus it can be seen that when the income is increased by Rs. 50,000., tax liability increased by Rs. 1,34,550. To prevent such a situation, the provision of marginal relief is provided to the tax payers.

Calculation of Marginal Relief

Continuing from the above example, following steps show the calculation of Marginal relief:

Step 1: Calculation of income tax and surcharge: In this case, as calculated above, the income tax inclusive of surcharge on Rs. 50,10,000 is Rs. 14,47,050.

Step 2: Compare additional income and incremental tax:

Incremental salary = 50,10,000 – 50,00,000 = Rs. 10,000

Incremental Tax = 14,47,050 (income tax inclusive of surcharge on 50,10,000) – 13,12,500 (Income tax on 50,00,000) = 1,34,550

In this case, since incremental tax (1,34,550) is more than incremental income (10,000), the assessee is eligible for Marginal Relief. The total incremental tax inclusive of surcharge will be restricted to Rs. 10,000 based on the concept of marginal relief.

Step 3: Calculation of Surcharge taking into account marginal relief:

In this case, total income is Rs. 50,10,000 on which income tax excluding surcharge is Rs. 13,15,500. If the total income would have been Rs. 50 lakhs, income tax would have been calculated as Rs. 13,12,500. Hence, the incremental income tax (excluding surcharge) is Rs. 3,000 (Rs. 13,15,500 – Rs. 13,12,500).

Since the incremental income tax inclusive of surcharge can be maximum Rs. 10,000 and Rs. 3,000 is consumed in incremental income tax, maximum amount of surcharge will be limited to Rs. 7,000 (10,000 – 3,000).

Hence calculation of income tax including surcharge shall be as follows:

However, it is to be noted that in case the incremental income tax inclusive of surcharge does not exceed the amount by which income exceeds the limits prescribed, the above calculation shall not be applicable and normal calculation of income tax shall apply.