High Income Taxpayers: Essential Update on Surcharge & Marginal Relief (AY 25-26 & Budget 25)

Understanding the intricacies of income tax can be quite difficult, particularly with terms such as 'Surcharge' and 'Marginal Relief'. These elements have a significant effect on high-income individuals in India. Grasping how they function is vital for precise tax calculations and planning.

This article outlines:

• 1. An explanation of Surcharge and the applicable rates for AY 2025-26 (FY 2024-25).
• 2. How Marginal Relief on Surcharge mitigates undesirable tax increases for AY 2025-26.
• 3. Major proposals from Budget 2025 that will affect FY 2025-26 (AY 2026-27), including a new category of Marginal Relief associated with tax rebates.

Let’s explore further!

Surcharge can be defined as an extra tax imposed on the income tax owed, rather than on the income itself. It applies to taxpayers whose earnings exceed specific defined limits. You can think of it as an additional charge on the tax, aimed at ensuring that those with higher incomes contribute more significantly to the country's finances.

The rates depend on your total income and the tax regime you choose:

Key Points:

• The New Tax Regime has set a maximum surcharge rate of 25%, effective from AY 2024-25, applicable even for incomes over Ôé╣ 5 Crore.
• Surcharge on tax due for dividend income and capital gains as per sections 111A, 112, and 112A is limited to 15% (unless specific provisions like 115A, 115AB, etc., are applicable).
• A Health & Education Cess of 4% is imposed on the total tax liability (Income Tax + Surcharge).

• For Firms (including LLPs) & Local Authorities: A surcharge of 12% applies if total income exceeds Ôé╣ 1 Crore.
• Domestic Companies: 
  • 7% if income is greater than Ôé╣ 1 Crore but less than or equal to Ôé╣ 10 Crore.
  • 12% if income exceeds Ôé╣ 10 Crore.
  • Flat rate of 10% if choosing concessional tax rates under Sec 115BAA or 115BAB.
• Foreign Companies: 
  • 2% if income is greater than Ôé╣ 1 Crore but less than or equal to Ôé╣ 10 Crore.
  • 5% if income exceeds Ôé╣ 10 Crore.

Consider a scenario where your income is just over a surcharge limit (for example, Ôé╣ 50.1 Lakhs). Without a relief mechanism, the application of surcharge could result in a tax increase that far exceeds the Ôé╣ 10,000 of income you earned above the Ôé╣ 50 Lakh limit. This situation appears inequitable, correct?

That’s where Marginal Relief comes into play.

Objective:

To ensure that the extra tax due (including surcharge) resulting from surpassing a surcharge threshold (Ôé╣50L, Ôé╣1Cr, Ôé╣2Cr, Ôé╣5Cr) does not surpass the income earned above that limit.

Mechanism:

The process guarantees that your total tax liability (inclusive of surcharge) is restricted. It must not exceed:

[Tax on the threshold figure (e.g., Ôé╣50L)] + [The income that surpasses the threshold (e.g., Ôé╣10,000)]

Calculation Steps:

1. Determine Tax (A): Assess the income tax owed on your total income, factoring in the relevant surcharge.
2. Determine Tax (B): Assess the income tax owed at the threshold just under your income level (for example, Ôé╣ 50 Lakhs, Ôé╣ 1 Crore, etc.). No surcharge is applicable at the exact threshold if it is the initial one.
3. Determine Income Exceeding Threshold (C): Calculate the difference between your total income and the threshold income. (For example, Ôé╣ 50,10,000 - Ôé╣ 50,00,000 = Ôé╣ 10,000).
4. Determine Increase in Tax (D): Calculate the difference between Tax (A) and Tax (B). This represents the additional tax you are liable to pay due to exceeding the threshold.
5. Assess Relief: If the Increase in Tax (D) is more than the Income Exceeding Threshold (C), you qualify for Marginal Relief. 
   • Marginal Relief Amount = D - C
6. Net Tax Payable = Tax (A) - Marginal Relief Amount 
   • Alternatively, the Net Tax Payable (excluding cess) will be Tax (B) + C.

Example (AY 2025-26, Old Regime):

Assume a person (under 60) has a total income of Ôé╣ 51,00,000.

1. Tax (A) on Ôé╣ 51,00,000 (Old Regime): 
   • Tax on Ôé╣ 51,00,000 = Ôé╣ 1,12,500 + 30% of (51,00,000 - 10,00,000) = Ôé╣ 1,12,500 + Ôé╣ 12,30,000 = Ôé╣ 13,42,500
   • Surcharge at 10% (given that income > Ôé╣50L) = 10% of Ôé╣ 13,42,500 = Ôé╣ 1,34,250
   • Total Tax (A) = Ôé╣ 13,42,500 + Ôé╣ 1,34,250 = Ôé╣ 14,76,750
2. Tax (B) on Ôé╣ 50,00,000 (Old Regime): 
   • Tax on Ôé╣ 50,00,000 = Ôé╣ 1,12,500 + 30% of (50,00,000 - 10,00,000) = Ôé╣ 1,12,500 + Ôé╣ 12,00,000 = Ôé╣ 13,12,500 (No surcharge is applicable at exactly Ôé╣50L).
3. Income Exceeding Threshold (C): Ôé╣ 51,00,000 - Ôé╣ 50,00,000 = Ôé╣ 1,00,000
4. Increase in Tax (D): Ôé╣ 14,76,750 - Ôé╣ 13,12,500 = Ôé╣ 1,64,250
5. Evaluate for Relief: Is D greater than C? Yes, Ôé╣ 1,64,250 > Ôé╣ 1,00,000. 
   • Marginal Relief = Ôé╣ 1,64,250 - Ôé╣ 1,00,000 = Ôé╣ 64,250
6. Net Tax Payable (before cess): Ôé╣ 14,76,750 - Ôé╣ 64,250 = Ôé╣ 14,12,500 
   • (Verification: Tax (B) + C = Ôé╣ 13,12,500 + Ôé╣ 1,00,000 = Ôé╣ 14,12,500)

Finally, add a 4% Health & Education Cess to Ôé╣ 14,12,500.

Looking Ahead: Budget 2025 Proposals (Effective FY 2025-26 / AY 2026-27)

The Budget 2025 introduced notable proposed modifications, primarily affecting the New Tax Regime, which will take effect from April 1, 2025 (FY 2025-26).

Key Proposed Modifications:

• Updated New Tax Regime Slabs: 
  • Ôé╣ 0 - Ôé╣ 4 Lakh: Nil
  • Ôé╣ 4 Lakh - Ôé╣ 8 Lakh: 5%
  • Ôé╣ 8 Lakh - Ôé╣ 12 Lakh: 10%
  • Ôé╣ 12 Lakh - Ôé╣ 16 Lakh: 15%
  • Ôé╣ 16 Lakh - Ôé╣ 20 Lakh: 20%
  • Ôé╣ 20 Lakh - Ôé╣ 24 Lakh: 25%
  • Above Ôé╣ 24 Lakh: 30%
• Heightened Rebate u/s 87A: The limit for tax rebates has been raised significantly under the new regime. Individuals with taxable income up to Ôé╣ 12 Lakhs will effectively incur zero tax due to a proposed rebate of up to Ôé╣ 60,000.
• Enhanced Standard Deduction: For salaried individuals and pensioners under the new regime, the standard deduction is slated to increase to Ôé╣ 75,000.
• A novel form of marginal relief is suggested, which is tied to the new Ôé╣ 12 Lakh rebate threshold.

• Objective: To offer assistance to taxpayers whose income slightly surpasses the new zero-tax threshold of Ôé╣ 12 Lakhs in the proposed new regime.
• Functioning: This ensures that the tax owed on income just exceeding Ôé╣ 12 Lakhs does not go beyond the amount of income that exceeds Ôé╣ 12 Lakhs.
• Eligibility: This relief is intended for resident individuals with taxable income ranging from Ôé╣ 12,00,001 to Ôé╣ 12,75,000 (according to the proposed new regime).
• Calculation Method: If your taxable income falls within this range, your tax liability (before cess) will be limited to: Your Total Taxable Income - Ôé╣ 12,00,000.

Assume a resident individual has a taxable income of Ôé╣ 12,10,000 under the new proposed regime.

1. Tax Calculation (without relief): 
   • For the first Ôé╣ 4L: Nil
   • For the next Ôé╣ 4L (@5%): Ôé╣ 20,000
   • For the next Ôé╣ 4L (@10%): Ôé╣ 40,000
   • For the remaining Ôé╣ 10,000 (@15%): Ôé╣ 1,500
   • Total Tax = Ôé╣ 61,500
2. Evaluate Marginal Relief (Rebate): Income is within Ôé╣ 12L to Ôé╣ 12.75L.
3. Implement Relief:
   • Income exceeding Ôé╣ 12L = Ôé╣ 12,10,000 - Ôé╣ 12,00,000 = Ôé╣ 10,000
   • The tax owed cannot exceed this figure.
   • Final Tax Payable (before cess) = Ôé╣ 10,000 (instead of Ôé╣ 61,500).

• If income was Ôé╣ 12,50,000: The standard tax calculation would yield Ôé╣ 67,500. The income exceeding Ôé╣ 12L is Ôé╣ 50,000. Hence, final tax payable (before cess) = Ôé╣ 50,000.
• If income was Ôé╣ 12,70,000: The regular tax calculated would be Ôé╣ 70,500. The income over Ôé╣ 12L is Ôé╣ 70,000. Final tax payable (before cess) = Ôé╣ 70,000.
• If income reached Ôé╣ 12,75,000: The normal tax would be Ôé╣ 71,250. The amount exceeding Ôé╣ 12L is Ôé╣ 75,000. Since the calculated tax (Ôé╣ 71,250) is lower than the excess income (Ôé╣ 75,000), no marginal relief will be given. Final tax payable (before cess) = Ôé╣ 71,250.

Will remain the same as in AY 2025-26 (maximum 25%). Marginal relief on surcharge (as described for AY 2025-26) will still apply to incomes exceeding Ôé╣50L, Ôé╣1Cr, and Ôé╣2Cr thresholds.

Bear in mind, the New Tax Regime is the default setting. If you wish to adopt the Old Tax Regime (to take advantage of various deductions such as HRA, Chapter VI-A deductions like 80C, 80D etc., which are largely disallowed under the new regime), you need to opt out of the new regime. For taxpayers with business income, the option to switch between regimes is restricted. Carefully evaluate based on your income, possible deductions, and the tax liability under both regimes.

The surcharge escalates the tax responsibility for high-income earners, while Marginal Relief serves as a vital safeguard, preventing disproportionate tax increases when income slightly exceeds designated thresholds (Ôé╣50L, Ôé╣1Cr, etc., for surcharge).

The Budget 2025 proposals for FY 2025-26 bring significant changes, particularly for the New Tax Regime, with updated slabs, a considerably higher zero-tax threshold (Ôé╣ 12 Lakhs due to rebate), and a specific marginal relief mechanism associated with this new threshold.

Keeping abreast of these details is essential for effective tax planning. Given the complexities, especially with the suggested changes, it is always wise to consult a tax professional to ensure compliance and optimize your tax obligations.