2014

As per the tax rates applicable for A.Y. 2015-16, if the annual taxable salary goes above Rs 1 crore, a surcharge of 10% on Income Tax is to be added to the Income Tax calculated as per the tax slabs. Consequently, the total Income Tax calculation shall include the following.

Total Income Tax = A + B + C

Note: Surcharge is 0% if the annual salary is less than or equal to Rs 1 crore.

The law provides for what is commonly known as marginal relief if the incremental income tax (including surcharge) — when the salary goes above Rs 1 crore — is more than the incremental salary amount (over and above Rs 1 crore).

Why marginal relief?

Let us illustrate the rationale behind providing marginal relief by way of a simple example.

When the annual salary is Rs 1 crore, the Income Tax is calculated as follows.

Annual Taxable Salary	1,00,00,000
Income Tax – A	28,25,000
Surcharge – B	0
Total Education cess – C	84,750
Total Income Tax – A+B+C	29,09,750

If the annual salary increases by Rs 10 beyond Rs 1 crore, a surcharge of 10% is applicable. In the absence of marginal relief, the Income Tax will be calculated as follows.

Annual Taxable Salary	1,00,00,010
Income Tax – A	28,25,003
Surcharge at 10% of Income Tax without marginal relief – B	2,82,500
Total Education cess – C	93,225
Total Income Tax – A+B+C	32,00,728

As you can see from the above, while the salary increases by just Rs 10 (from Rs 1 crore to Rs 1 crore and ten) the Income Tax and Surcharge (excluding Education Cess) increases by Rs 2,82,503. The increase in Income Tax and Surcharge is disproportionate to the increase in salary.

Clearly, the employee is better off taking a pay cut of Rs 10 to bring the salary down to Rs 1 crore!

The Income Tax Department provides for marginal relief on Surcharge to ensure that the increase in Income Tax (including Surcharge) does not go beyond the increase in salary when the salary increases beyond Rs 1 crore. Marginal relief means that the additional Income Tax (including Surcharge) shall be restricted to the increase in salary beyond Rs 1 crore.  The Education Cess however will be calculated as 3% of Income Tax plus restricted Surcharge.

Calculation of marginal relief

Whenever the annual salary increases beyond Rs 1 crore, the calculation of Surcharge shall be as follows. Let us assume the salary is Rs 1,00,74,000 (Rupees One Crore and Seventy Four Thousand) for the purpose of illustration.

Step 1: Calculate the total of Income Tax and Surcharge (excluding Education Cess).

If the annual salary is Rs 1,00,74,000, the Income Tax and Surcharge shall be as follows.

Income Tax	28,47,200
Surcharge (@ 10% of Income Tax)	2,84,720
Income Tax plus Surcharge	31,31,920

Step 2: Check if the incremental salary (beyond Rs 1 crore) is more than the incremental tax (including Surcharge).

Incremental salary (more than Rs 1 crore) = Rs 1,00,74,000 – 1,00,00,000 = Rs 74,000

Incremental tax (including Surcharge) = Rs 31,31,920 (on Rs 1,00,74,000) – 28,25,000 (on Rs 1,00,00,000)= Rs 3,06,920.

In this case, the incremental tax (Rs 3,06,920) is greater than the incremental salary Rs 74,000. Hence, marginal relief is applicable. The total of incremental income tax including surcharge shall be restricted to Rs 74,000.

Step 3: Calculate the Surcharge after taking into account the marginal relief.

Annual salary = Rs 1,00,74,000

Income Tax: Rs 28,47,200 (excluding Surcharge)

When the salary is Rs 1 crore the Income Tax amount (excluding Surcharge) is Rs 28,25,000. The incremental Income Tax (excluding Surcharge) = Rs 28,47,200 – Rs 28,25,000 = Rs 22,200.

Since the incremental Income Tax + Surcharge should be Rs 74,000, and Rs 22,200 has been absorbed in the incremental Income Tax, the remaining amount of Rs 51,800 shall be the Surcharge.

Step 4: Calculate Education Cess on Income Tax and restricted Surcharge.

Annual Taxable Salary	1,00,74,000
Income Tax – A	28,47,200
Surcharge – B	51,800
Total Education cess – C	86,970
Total Income Tax – A+B+C	29,85,970

Try calculating the Surcharge for an annual taxable salary of Rs 2 crore and check if marginal relief is applicable.

No marginal relief on Education Cess – An anomaly?

It may be noted that marginal relief is available only on Income Tax and Surcharge and not on Education Cess. From the earlier example,

Annual Taxable Salary	1,00,74,000
Income Tax – A	28,47,200
Surcharge – B	51,800
Total Education cess – C	86,970
Total Income Tax – A+B+C	29,85,970

The incremental Income Tax and Surcharge is restricted to the incremental salary of Rs 74,000. However, when we consider the total of Income Tax, Surcharge, and Education Cess of Rs 29,85,970, the total incremental tax vis-a-vis that for the annual salary of Rs 1 crore is Rs 76,220 (Rs 29,85,970 – Rs 29,09,750).

Surely, the total incremental tax of Rs 76,220 is greater than the incremental salary of Rs 74,000. This is because the marginal relief is available only for Surcharge and not for Education Cess.

We wonder why the Income Tax Department left Education Cess out of the purview of marginal relief.

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The Indian Income Tax Act stipulates the conditions under which a salaried employee can claim tax rebate on interest payment on housing loan. Section 24 of the Income Tax Act states that no tax benefit is permissible on interest payment during the years in which construction of the house property is still to be completed. Interest paid during the construction period is eligible for deduction in 5 equal installments (across 5 years) from the year construction is completed.

What about tax rebate on account of principal repayment? When the property, for which a loan has been taken, is under construction, can an employee claim tax benefit under Section 80C for principal repayment?

Some payroll managers are of the view that Section 80C doesn’t prohibit tax benefit on account of principal repayment when the property is under construction. After all, there is no explicit reference to completion of construction or taking possession of the property in the text of Section 80C. Hence, is it not fine to claim tax benefit on principal repayment under Section 80C even when the house property is under construction?

Not quite. A close look at Section 80C suggests that tax rebate on principal repayment may not be admissible when the property is under construction.

The relevant clause under Section 80C(2)(xviii) is presented as follows.

(xviii)  for the purposes of purchase or construction of a residential house property the income from which is chargeable to tax under the head “Income from house property” (or which would, if it had not been used for the assessee’s own residence, have been chargeable to tax under that head), where such payments are made towards or by way of—

(a)  any instalment or part payment of the amount due under any self-financing or other scheme of any development authority, housing board or other authority engaged in the construction and sale of house property on ownership basis; or

(b)  any instalment or part payment of the amount due to any company or co-operative society of which the assessee is a shareholder or member towards the cost of the house property allotted to him; or

(c)  repayment of the amount borrowed by the assessee from—

(1)  the Central Government or any State Government, or

(2)  any bank, including a co-operative bank, or

(3)  the Life Insurance Corporation, or

(4)  the National Housing Bank, or

(5)  any public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes which is eligible for deduction under clause (viii) of sub-section (1) of section 36, or

(6)  any company in which the public are substantially interested or any co-operative society, where such company or co-operative society is engaged in the business of financing the construction of houses, or

(7)  the assessee’s employer where such employer is an authority or a board or a corporation or any other body established or constituted under a Central or State Act, or

(8)  the assessee’s employer where such employer is a public company or a public sector company or a university established by law or a college affiliated to such university or a local authority or a co-operative society; or

(d)  stamp duty, registration fee and other expenses for the purpose of transfer of such house property to the assessee,

but shall not include any payment towards or by way of—

(A)  the admission fee, cost of share and initial deposit which a shareholder of a company or a member of a co-operative society has to pay for becoming such shareholder or member; or

(B)  the cost of any addition or alteration to, or renovation or repair of, the house property which is carried out after the issue of the completion certificate in respect of the house property by the authority competent to issue such certificate or after the house property or any part thereof has either been occupied by the assessee or any other person on his behalf or been let out; or

(C)  any expenditure in respect of which deduction is allowable under the provisions of section 24;

Clause (xviii) stated above suggests that any payment (including principal repayment of housing loan) for the purpose of purchase or construction of a residential house property the income from which is chargeable to tax under the head “Income from house property” can be considered for tax benefit under Section 80C.

In other words, for consideration under Section 80C, the property should be capable of generating income (real or notional) which is chargeable under the head “Income from house property.” Section 22 and 23 of the Income Tax Act present the introduction to income from house property and determination of the annual value of a house property.

When a house property is under construction, there is no likelihood of income, and hence under Section 80C there is no provision for tax rebate on account of principal repayment. Only in the year in which the construction is completed can the principal repayment be considered for tax benefit.

What about stamp duty and registration fee?

The above rule is applicable to not only principal repayment but also stamp duty and registration charges. Such charges cannot be considered for tax benefit under Section 80C as long as the property is under construction.

Please note that stamp duty and registration charges can be considered for Section 80C benefit even in the absence of housing loan as long as the construction/possession of the house property is complete/taken.

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