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Marginal relief & its effects on your Income from our perspective (part-1)

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Marginal relief & its effects on your Income from our perspective (Part – 1)

What is marginal relief and how is it calculated?

  • The surcharge levied is subject to marginal relief to ensure the payable amount does not exceed the income which is in excess of the threshold.
  • Individuals with a total taxable income between ₹50 lakh to ₹1 cr will pay a surcharge of 10%, those with an income between ₹1 cr to ₹2 cr will pay 15%, those with an income between ₹2 cr to ₹5 cr will pay 25% & those with an income above ₹5 cr will pay 37%.
  • However, the actual surcharge levied is subject to marginal relief to ensure the payable amount does not exceed the income which is in excess of the threshold. But what exactly is marginal relief and how is it calculated?

Marginal relief

According to the Income-tax Act, 1961, a marginal relief is given to individuals whose taxable income is beyond the threshold limit after which surcharge is payable, but the net income above the threshold is less than the surcharge.

For example, if you’re an individual and your total taxable income is ₹51 lakh in a financial year, you will be required to pay a 10% surcharge applicable on taxable income between ₹50 lakh and ₹1 crore.  After taking into account all the deductions, you’ll end up paying ₹13, 42,500 as tax and the surcharge would be ₹1, 34,250. However, the surcharge amount here is more than the difference between your taxable income and the margin which puts you in the higher tax slab, which is ₹1 lakh (₹51 lakh minus ₹50 lakh).

To adjust this anomaly, the surcharge is subject to marginal relief. In this case, the net income over ₹50 lakh is ₹70,000 (₹1 lakh which is the income crossing ₹50 lakh mark, less 30% income tax). Hence, the actual surcharge would be ₹70,000 and the net tax liability would be ₹14, 12,500 (₹13, 42,500 plus ₹70,000) plus an additional education and health cess at 4% equal to ₹56,500. Therefore, the net income tax payable would be ₹14, 12,500 plus ₹56,500 or ₹14, 69,000.

Now, with the help of few more examples we will see the effect of surcharge on your tax & the income you are taking home after paying tax. In our examples we will take different income groups on which surcharge is applicable especially when you shift from lower surcharge to higher surcharge rate because of increase in income. If income increases just by ₹2 lakh from ₹1 cr to ₹1.02 cr or  ₹2 cr to ₹2.02 cr  how much it will effect on your tax and income actually earned within the purview of marginal relief.

Examples:-

(Please scroll left right to view full table)

[supsystic-tables id=1]

Analysis

  • Take home income is decreasing in example (f) & (g) as compare to (e), even though the earned income is more than Rs. ₹ 5 cr.
  • Take home income is same in example (e) & (h), even though the income earned increased by ₹32 lakh (appx.).
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