What is marginal relief and how it is computed?

If you come under the higher income tax brackets i.e. 30%, then you are liable for paying an additional amount of surcharge on the Income-tax amount you are liable to pay. 

In simple terms, a surcharge on Income-tax can be defined as the additional amount those taxpayers need to pay who have a higher amount of income. A surcharge is levied on the payable tax of a taxpayer and not on the generated income of an individual. The main motive behind the Government introducing the concept of surcharge is to ensure that the rich people contribute more towards taxes rather than poor people.

Let us understand the surcharge by a simple example. Suppose, a taxpayer has an income of Rs.100. On the income of Rs.100, the tax levied is Rs.30. In this case, the surcharge value would be 10% of the tax amount i.e. 10% of Rs.30. So, the surcharge amount would be Rs.3. There are different levels of surcharge applicable for different taxpayers as per the Income-tax Act, 1961.

In our country, the surcharge rate is 10% if the income of a taxpayer is Rs.50 lakhs and it is 15% if the income of the taxpayer was Rs. 1 crore. In the case of companies also surcharge is imposed if the companies have an income that is more than Rs.1 crore. 

Let us have a look at the different levels of surcharge rates applicable for different categories of taxpayers.

• For Individuals, Undivided Hindu Family with income more than Rs. 50 lakhs but less than Rs.1 crore the surcharge rate is 10%.
• For individuals, Undivided Hindu Family with income more than Rs.1 crore the surcharge rate is 15%.
• In the case of firms, Co-operative Society, local authorities, etc. with a net income that exceeds Rs.1 crore the surcharge is 12%.
• For Domestic companies with a net income of more than Rs. 1 crore but less than Rs. 10 crores the rate of surcharge is 7%.
• For Domestic companies with a net income of more than Rs. 10 crores, the surcharge rate is 12%.
• For foreign companies with a net income of more than Rs.1 crore, the rate of surcharge is Rs. 2%.
• For foreign companies which have an income of more than Rs.10 crores, the surcharge rate is 5%.

Another important point to be considered here is that in those cases where a surcharge is imposed, health and education cess will also be imposed on the combined amount of Income-tax and surcharge.  Individuals who are liable for the payment of Income-tax are liable to pay health and education cess as well. Like surcharge, health and education cess are also imposed on the tax to be paid and not on the income of the taxpayer. 

For example, if a taxpayer is having an income of Rs.100 and the Income-tax to be levied on this income is Rs.30. Now, the health and education cess to be imposed on this tax of Rs.30 is 4% i.e. 4% of Rs.30 i.e. Rs.1.2.

As said earlier, the surcharge is levied on those taxpayers whose income exceeds the prescribed minimum amount.  However, there might be certain cases where the taxpayer would have to pay the surcharge even if his income will exceed the prescribed limit marginally. In order to provide some amount of relief to the taxpayer, the Government has introduced the concept of Marginal Relief. Marginal relief is relaxation or relief which is given to a taxpayer from the levy of surcharge if the surcharge was being imposed on him as his income exceeded the prescribed limits marginally.

The major aim of the provision of marginal relief is to ensure that the amount of tax a taxpayer pays after including the surcharge is more than the amount of his income exceeding the prescribed limits. In simple terms, we can say that Marginal relief applicability is seen for those taxpayers whose net income is more than Rs.50, 00,000 or Rs.1, 00, 00,000. If there is a minor increase in the net income which exceeds the prescribed limits, then there will be a huge increase in the tax to be paid. So, the provision of marginal relief will be of great help in these cases. There tends to be a major difference in the normal tax liability and the tax liability under marginal relief.  Moreover, marginal relief applicability is possible in case of surcharge only and not on cess.

Marginal Relief Calculation and effect of Marginal relief on Taxable Income

The concept of marginal relief is designed to provide relaxation from levy of surcharge to a taxpayer where the total income exceeds marginally above Rs. 50 lakhs, Rs. 1 crore or Rs. 10 crores, as the case may be.

Thus, while computing surcharge, in case of taxpayers (i.e. Individuals/HUF/AOP/BOI/artificial juridical person) having total income of more than Rs. 50 lakhs marginal relief shall be available in such a manner that the net amount payable as income-tax and surcharge shall not exceed the total amount payable as income-tax on a total income of Rs. 50 lakhs by more than the amount of income that exceeds Rs. 50 lakhs.

In the case of a company, the surcharge is levied @ 7% (2% in case of foreign company) on the amount of income-tax if the total income exceeds Rs. 1 crore but does not exceed Rs. 10 crores and @ 12% (5% in case of foreign company) on the amount of income-tax if total income exceeds Rs. 10 crores. Hence, in the case of a company whose total income exceeds Rs. 1 crore but does not exceeds Rs. 10 crores, marginal relief will be computed as discussed above, but in the case of a company having a total income above Rs. 10 crores marginal relief is available in such a manner that the net amount payable as income-tax and surcharge shall not exceed the total amount payable as income-tax and surcharge on total income of Rs. 10 crores by more than the amount of income that exceeds Rs. 10 crores.

Illustration for better understanding

Mr Mukesh is a salaried employee (age 40 years). His total income from salary for the year 2017-18 amounts to Rs. 51, 00,000. Will, he be liable to pay the surcharge, if yes, then how much will he get the benefit of margin relief?

**

The surcharge is additional tax levied on the amount of income tax. In the case of taxpayers (i.e. Individuals/HUF/AOP/BOI/artificial juridical person), the surcharge is levied @ 10% on the amount of income-tax where the total income of the taxpayer exceeds Rs. 50 lakhs. In this case, the total income of Mr Mukesh exceeds Rs. 50 lakhs and hence he will be liable to pay a surcharge. Marginal relief is available in cases where the total income is slightly above Rs. 50 Lakhs. The computation of normal tax liability (i.e. liability without marginal relief) and tax liability under marginal relief (i.e. liability after marginal relief) will be as follows:

(1) Normal tax liability (i.e. without marginal relief)

(*) The normal tax rates for the financial year 2017-18 applicable to an individual below the age of 60 years are as follows:

Nil up to an income of Rs. 2, 50,000

5% for income above Rs. 2, 50,000 but up to Rs. 5, 00,000

20% for income above Rs. 5, 00,000 but up to Rs. 10, 00,000

30% for income above Rs. 10, 00,000.

Apart from the above rates, a cess will be computed separately.

(2) Tax liability under marginal relief (i.e. after marginal relief)

Conclusion

Normal tax liability (i.e. without marginal relief) comes to Rs. 14, 76,750 and tax liability under marginal relief comes to Rs. 14, 12,500. It can be observed that tax liability under marginal relief is lower and, hence, Rs. 14, 12,500 will be the tax liability before cess. Total tax liability will be computed as follows:

(*) In this case, the surcharge paid by Mr Mukesh will be Rs. 70,000 computed as follows:

 Illustration for better understanding

Mr Raja is a businessman (age 35 years). His total income for the year 2017-18 amounted to Rs. 1, 02, 00,000. Will he be liable to pay the surcharge, if yes, then how much and will he get the benefit of marginal relief?

**

The surcharge is additional tax levied on the amount of Income-tax. In the case of taxpayers (i.e. Individuals/HUF/AOP/BOI/artificial juridical person), the surcharge is levied @ 10% on the amount of Income-tax where the total income of the taxpayer exceeds Rs. 1 crore. In this case, the total income of Mr Raja exceeds Rs. 1 crore and hence he will be liable to pay a surcharge. Marginal relief is available in cases where the total income is slightly above Rs. 1 crore. The Computation of normal tax liability (i.e. liability without marginal relief) and tax liability under marginal relief (i.e. liability after marginal relief) will be as follows:

(1) Normal tax liability (i.e. without marginal relief)

(*) The normal tax rates for the financial year 2017-18 applicable to an individual below the age of 60 years are as follows:

Nil up to an income of Rs. 2, 50,000

5% for income above Rs. 2, 50,000 but up to Rs. 5, 00,000

20% for income above Rs. 5, 00,000 but up to Rs. 10, 00,000

30% for income above Rs. 10, 00,000.

Apart from the above rates, a cess will be computed separately.

(2) Tax liability under marginal relief (i.e. after marginal relief)

Conclusion

Normal tax liability (i.e. without marginal relief) comes to Rs. 33, 03,375 and tax liability under marginal relief comes to Rs. 32, 93,750. It can be observed that tax liability under marginal relief is lower and, hence, Rs. 32, 93,750 will be the tax liability before cess. Total tax liability will be computed as follows:

Illustration for better understanding

Mr Karan is a businessman (age 35 years). His total income for the year 2017-18 amounted to Rs. 1, 07, 00,000. Will he be liable to pay the surcharge, if yes, then how much and will he get the benefit of marginal relief?

**

A surcharge is an additional tax levied on the amount of Income-tax. In the case of taxpayers (i.e. Individuals/HUF/AOP/BOI/artificial juridical person) surcharge is levied @ 15% on the amount of income-tax where the total income of the taxpayer exceeds Rs. 1 crore. In this case, the total income of Mr Karan exceeds Rs. 1 crore and hence he will be liable to pay the surcharge. Marginal relief is available in cases where the total income is slightly above Rs. 1 crore. The computation of normal tax liability (i.e. liability without marginal relief) and tax liability under marginal relief (i.e. liability after marginal relief) will be as follows:

(1) Normal tax liability (i.e. without marginal relief)

(*) Tax rates are discussed in the previous illustration.

(2) Tax liability under marginal relief (i.e. after marginal relief)

Conclusion

Normal tax liability (i.e. without marginal relief) comes to Rs. 34, 75,875 and tax liability under marginal relief comes to Rs. 35, 12,500. It can be observed that normal tax liability (i.e. without marginal relief) is lower and, hence, Rs. 34, 75,875 will be the tax liability before cess. Total tax liability will be computed as follows:

Moreover, marginal relief is also applicable to firms and domestic companies. In the case of firms, where the net income is more than Rs.1 crore then a surcharge of 12% is levied on the payable income tax. Marginal relief is applicable for these firms i.e. the payable income tax along with a surcharge for income more than Rs.1 crore should not exceed the payable income tax for Rs.1 crore by an amount that is more than the amount of income just exceeding Rs.1 crore. 

Similarly, for domestic companies which have a net income of more than Rs.1 crore but less than Rs.10 crore, a surcharge of 7% will be levied on the payable income tax. By the provision of marginal relief, the payable income tax along with a surcharge for income more than Rs.1 crore should not exceed the payable income tax for Rs.1 crore by an amount that is more than the amount of income just exceeding Rs.1 crore. This similar provision is also applicable for domestic companies having a net income which is more than Rs.10 crore.

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Hence, the concept of Marginal Relief deals with the major idea and intent that the increase in Income Tax should not become more than the amount increased in the income of a taxpayer. By the effect of marginal relief, the Income Tax liability of a taxpayer tends to reduce. Be it individuals, HUFs, firms, domestic or foreign companies the provision of marginal relief is beneficial for all.

FAQs

1. On which amount the surcharge is calculated?
   The surcharge is calculated on the total payable income tax and not on the total income.
   
   
2. What is Education cess?
   Cess is a type of tax that the Government imposes on its people with the aim of raising funds for a particular purpose. Education cess is the tax that is used by the Government in promoting primary, secondary and higher education.