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Surcharge Income Tax

Surcharge and Cess

Last Updated 13th May 2021

  • A surcharge is levied on the tax liability of the taxpayers when the net income crosses a specific limit.
  • The Government imposes cess on all taxpayers for creating funds for specific causes.
  • The rate of surcharges varies from 2% to 37% for individuals, domestic and foreign.
  • The rate of cess is decided by the Government.
  • The burden of the surcharge is relaxed with marginal relief.
INCOME TAX CALCULATOR

Surcharge on Income Tax

A surcharge, as the name suggests, is an additional tax. It is levied on the existing income tax when the total income of the assessee in a financial year exceeds the specified income limit. However, keep in mind that the surcharge is imposed on the payable tax and not on the income. The surcharge is charged at different income tax slab rates based on the categorization of the taxpayers. The rate of surcharges generally ranges from 2% to 37%. The concept of surcharge on income tax was first presented in the Finance Act of 2013.

As per the basic concept, suppose your total income has crossed your certain respective limit in a financial year. You are to be charged a surcharge of 10% and you are supposed to pay a tax of ₹ 5,000 In this scenario, 10% of the ₹ 5,000 i.e., ₹ 500 will be your surcharge income tax.

Surcharge for Individuals

Initially, the surcharge on capital gain was imposed at a rate of 10% for individuals. The surcharge was increased to a rate of 12% in the 2015 Budget and later to 15% in the 2016 Budget. The 2019 Budget has further increased the rates. As per the 2017 Budget, individuals become subject to a surcharge when their net income in a financial year crosses ₹ 50 Lakh. The rates of surcharge income tax vary from individuals and companies.

Health and Education Cess

Surcharge and cess are similar concepts. Cess is a tax that is levied on the payable tax. Unlike, surcharge, cess is applicable for every taxpayer of the country regardless of categories. It is basically a government-imposed tax that is collected from the taxpayers and used for specific reasons. The fund created by collecting cess has to be used for the same purpose it was created. Hence, health and education cess is used for the health and education-related necessities of those belonging to the below poverty line. The current rate of health and education cess is 4%. The key difference between surcharge and cess is the income limit. The surcharge is applied when the net income crosses the specified limit, while cess is levied on all taxpayers.

Surcharge Current Rates

Surcharge on capital gain is levied at different charges on different taxpayers. Below goes the current surcharge rates.

Surcharge levied on individuals, HUFs, Association of Person, Body of Individuals and Artificial Judicial Person

Income Limit Surcharge Rate
Below ₹ 50 Lakh None
Above ₹ 50 Lakh but not more than ₹ 1 Cr 10%
Above ₹ 1 Cr but no more than ₹ 2 Cr 15%
Above ₹ 2 Cr but not more than ₹ 5 Cr 25%
More than ₹ 5 Cr 37%

The previous surcharge rate was capped at 15%. In the Union Budget of 2019, the surcharge rate was increased to 25% for annual income between ₹ 2 Cr and ₹ 5 Cr. For annual income exceeding ₹ 5 Cr, the surcharge rate had been raised to 37%.

Surcharge levied on domestic companies

Income Limit Surcharge Rate
Below ₹ 1 Cr None
Below ₹ 1 Cr but no more than ₹ 10 Cr 7%
More than ₹ 10 Cr 12%

Surcharge levied on foreign companies

Income Limit Surcharge Rate
Below ₹ 1 Cr None
Below ₹ 1 Cr but no more than ₹ 10 Cr 2%
More than ₹ 10 Cr 5%

Under the Income Tax Act of 1961, companies located outside the country are considered foreign companies. As mentioned in the table, the surcharge applicable to foreign companies is lower than domestic companies. The difference is due to the higher tax rates levied on foreign companies than domestic companies.

How Surcharge is Calculated?

The calculation of surcharge starts with calculating the Gross Total Income or GTI. Incomes generated from five separate sources make the GTI. Deductions are made from the GTI as per the instruction of the Income Tax Act of 1961. The remaining amount is the net tidal income. Based on the net total income surcharge is levied at the respective rates on individuals and companies. Below are a few illustrations for a better understanding.

Individual surcharge

Suppose your total net income is ₹ 1.10 Cr and the payable income tax is ₹ 31.12 Lakh . As the net income has crossed the mark of ₹ 1 Cr, the surcharge will be levied at the rate of 15%. Hence, 15% of your payable tax of ₹ 31.12 Lakh i.e., ₹ 4.67 Lakh will be added to your existing payable tax, raising your tax liability to ₹ 35.79 Lakh .

Domestic company surcharge

Suppose the net income of a domestic company is ₹ 1.10 Cr and the payable income tax is ₹ 33 Lakh . The company will be charged with a surcharge rate of 7% as per the table mentioned above. Hence, 7% of the payable income tax of ₹ 33 Lakh i.e. ₹ 2.31 Lakh will be added to the existing tax liability. The new tax liability of the company will thus be ₹ 35.31 Lakh .

Foreign company surcharge

Suppose, the net income of a foreign company is ₹ 1.10 Cr and the existing payable income is ₹ 44 Lakh . As per the specified rates, 2% of the payable tax of ₹ 44 Lakh i.e. ₹ 88,000 will be added to your existing payable tax making the new tax liability an amount of ₹ 44.88 Lakh .

Concept of Marginal Relief

The concept of marginal relief reduces the burden of surcharge for many. The surcharge is applied when the income crosses a specified limit. However, taxpayers end up paying a huge amount as surcharge even when their incomes cross the surcharge marginally. To relieve the taxpayers from such instances of surcharge, the concept of marginal relief was introduced. The marginal relief makes sure that the existing payable tax including the surcharge amount does not surpass the exceeded income that is causing the application of surcharge.

For example, suppose your net income is ₹ 50.10 Lakh As per the standard rate, 10% surcharge is supposed to be imposed on your existing payable tax. As per the tax slab, if your income was ₹ 50 Lakh, your payable tax would have been ₹ 1.12 Lakh . However, your net income of ₹ 50.10 Lakh makes your payable tax amount ₹ 13.15 Lakh and the surcharge amount become ₹ 1.32 Lakh making your total payable tax an amount of ₹ 14.47 Lakh . However, this amount is more than the exceeded amount. Margin relief reduces your tax burden in such situations.

How Marginal Relief is Calculated?

Here goes the step by step process for calculating the marginal relief.

Step 1: Calculate exceeded income and increased tax

Total net income: ₹ 50.10 Lakh

Existing payable tax: ₹ 13.15 Lakh

Surcharge: ₹ 1.32 Lakh

Total payable tax: ₹ 14.47 Lakh

Step 2: Compare exceeded income and increased tax

Exceeded income: (₹ 50.10 Lakh - ₹ 50 Lakh ) = ₹ 10,000

Increased tax: ₹ 14.47 Lakh (total payable tax including existing tax and surcharge) - ₹ 13.12 Lakh (payable tax on ₹ 50 Lakh ) = ₹ 1.35 Lakh

In this scenario, the increased tax = ₹ 13.15 Lakh (based on ₹ 5.01 Cr) - ₹ 13.12 Lakh (based on ₹ 50 Lakh) = ₹ 3,000

Hence, the maximum surcharge amount = ₹ 10,000 (exceeded amount) - ₹ 3,000 (increased tax) = ₹ 70,000

Step 3: Calculate surcharge considering margin relief

Total net income: ₹ 50.10 Lakh

Existing payable tax: ₹ 13.15 Lakh

Surcharge: ₹ 7,000

Total payable tax:₹ 1.32 Cr

FAQs

What is the difference between surcharge and cess?

A surcharge is levied when the total net income crosses the specified limit. On the other hand, cess is applied to every taxpayer of the country. Government levies this tax for creating funds for specific causes.

How are surcharge and cess calculated?

The surcharge is based on the exceeding amount. A particular percentage of the existing payable tax when the total income exceeds a specified limit is added to your tax liability. Cess is calculated based on the rate as instructed by the Government.

What is Cess tax in India?

Cess tax in India is levied on the existing tax liability of the taxpayers. The Government imposes cess tax when there is a need for creating funds for specific purposes. The rate is decided by the Government.

What is the surcharge on income tax for FY 2019 20?

The surcharge in income tax for FY 2019 20 is imposed at rates ranging from 10% to 37% on individuals, 7% to 12% on domestic companies and 2% to 5% on foreign companies.

How much are surcharge and education cess on income tax?

The surcharge is decided based on the exceeding income and education cess is levied at a rate of 4% on income tax.

Is surcharge applicable on TDS?

A surcharge is calculated on the total payable tax of the taxpayers.

How is income tax surcharge calculated?

When the total net income of an individual, domestic company or a foreign company exceeds specified limits, a particular percentage of the existing payable tax is added as a surcharge.

How do you calculate a fuel surcharge?

The rate of fuel surcharges in India ranges from 1% to 3%, which means an amount between 1% to 3% of the fuel price is added as a surcharge. For example, if you buy fuel worth ₹ 500 , you may have to pay an amount between ₹ 505 to ₹ 518.


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