Blog

Marginal relief on surcharge

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.

A – Income Tax (calculated as per slabs)

B – Surcharge (10% of Income Tax)

C – Education Cess, including Secondary and Higher Education Cess (3% of Income Tax and Surcharge)

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

Note: If the incremental salary (beyond Rs 1 crore) is more than the incremental tax (including Surcharge), there will be no marginal relief and consequently the Surcharge shall be a full 10% of the Income Tax.

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.

Marginal relief calculation for FY 2017-18 – An example

We received the below request from a reader recently.

Request your guidance on the calculation of surcharge with marginal relief for an income of 10001000 (one crore and one thousand).

The below calculations are for FY 2017-18.

1. Calculate the income tax and surcharge for Rs 10001000 (Rupees One Crore and One Thousand)

Salary: 1,00,01,000
Income Tax: 28,12,800
Surcharge: 4,21,920
Total Tax (A): 32,34,720

2. Calculate the income tax and surcharge for Rs 10000000 (Rupees One Crore)

Salary: 1,00,00,000
Income Tax: 28,12,500
Surcharge: 2,81,250
(Note: There is a surcharge of 10% for salary above Rs 50 lakh up to Rs 1 crore in FY 2017-18)

Total Tax (B): 30,93,750

3. Check if increase in salary beyond Rs 1 crore is more than the increase in tax

Increase in salary (beyond Rs 1 crore) = 1,00,01000 – 1,00,00,000 = Rs 1,000
Increase in tax = A – B = Rs 32,34,720 – 30,93,750 = Rs 140,970

Since the increase in salary (beyond Rs 1 crore) is less than the increase in tax, the employee is eligible for marginal relief.

4. Calculate marginal relief

Marginal relief = Rs 140,970 – Rs 1,000 = Rs 1,39,970

5. Calculate total tax after applying marginal relief

Salary: 1,00,01,000
Income Tax (T): 28,12,800

Surcharge (C): 4,21,920
Marginal Relief (D): 1,39,970
Net Surcharge (E): 2,81,950

Education Cess at 3% of tax + surcharge (F): 92,843

Total Tax (T+E+F): Rs 31,87,593

Posted in: Blog

Leave a Comment (28) ↓

28 Comments

  1. SANTOSH KUMAR SAHOO May 5, 2014

    Than You Very Much Sir
    .

    reply
  2. kalyan September 2, 2014

    Thnx a lot.
    Now i understood the full concept of the marginal relief…
    Once again Thnx a lot to HINOTE..
    (Y)..

    reply
  3. Vicks August 10, 2015

    One question – For marginal relief calculation does the total income include the capital gain? I guess its not included as capital gain is taxed at different rate? Please clarify.

    reply
    • gautham August 11, 2015

      The total income includes capital gain for the purpose of the checking the Rs 1 crore income limit.

      Let us assume that a person has income from salary and capital gains. The steps with regard to surcharge calculation are as follows:

      1. Calculate the total tax after calculating salary tax and capital gains tax separately.
      2. Check if the total income (salary + capital gain) is greater than Rs 1 crore.
      3. If no, calculate the education cess on the total income tax.
      4. If yes, calculate surcharge (after marginal relief, if applicable) on the total income tax and then calculate education cess on income tax and surcharge.

      reply
  4. PERATCHI SELVAM B September 19, 2015

    Thank You so much for giving this amazing tutorial.

    reply
  5. Sheetal October 5, 2015

    Its a very helpful article to clearly understand marginal relief.
    Thank u very much.

    One doubt is u calculated tax on Rs.1 cr i.e. Rs.28,25,000 .
    Is nt the rate applicable will b @30%, which means Rs.30,00,000?
    Looking forward for ur reply.
    Thank u.

    reply
    • gautham October 5, 2015

      Please apply the tax rates across different income slabs. As you would be aware, 30% rate is only for income more than Rs 10 lakh per annum and not the entire Rs 1 crore.

      reply
      • Sheetal October 5, 2015

        Yesss
        But For company ??

        reply
        • gautham October 6, 2015

          30%. I was referring to individuals.

          reply
  6. Sheetal October 5, 2015

    For salary of Rs 2 crore ,no marginal relief will b applicable.
    Right?

    reply
    • gautham October 6, 2015

      Yes.

      reply
      • Sheetal October 7, 2015

        Thank u very much.

        reply
  7. faijal khunkhana November 4, 2015

    Thank you, Sir…..
    Surcharge Calculation step very simple with Example

    reply
  8. Mohammed Aslam January 7, 2016

    like if assessee has income of P.Y 12-13 1,05,00,000. For salary income & he has recived arrears salary in a.y 15-16 i.e1.05 cr as discuss earlier so how to calculate marginal relief

    reply
    • gautham January 11, 2016

      If the total salary amount crosses Rs 1 crore, the marginal relief, if applicable, is to be calculated.

      reply
  9. Monesh January 12, 2016

    Thank u so much

    reply
  10. Ishwor yadav March 7, 2016

    Thanks a lots , it is very useful for learning purpose.

    reply
  11. Jaisan June 1, 2016

    Really it’s clear and understanding… Thanks

    reply
  12. Divya September 15, 2016

    What would be the marginal relief in case when MAT provisions are applicable?

    reply
  13. ankita December 21, 2016

    thanks…

    reply
  14. Ravikant sharma January 8, 2017

    Sir vo amount kon si h jisme marginal relief or tax dono equal ho. Ya to tax bhar do ya marginal relief kr do . kya h vo amount jiska tax bhre to ya mrgnl relief dono epual ho.plesss

    reply
    • gautham January 13, 2017

      I am unable to understand your question. Can you please rephrase it?

      reply
  15. Md Wasim Alam February 15, 2017

    Good

    reply
  16. gopal rao May 5, 2017

    tq,sir

    reply
  17. Aishwarya August 8, 2017

    Thank you sir, it’s really very helpful.

    reply
  18. Shruti Pandey November 30, 2017

    Thanks alot

    reply
  19. Mayur January 31, 2018

    Hi,
    As per
    https://www.incometaxindia.gov.in/pages/tools/income-tax-calculator.aspx
    If income from salary : 1,02,00,000
    Short term capital gain ( 15 % / 111A) : 1000
    Then surcharge with marginal relied comes as = 4,21,935
    I tried to calculate the same using your method, but I am not able to get surcharge as 4,21,935.
    Can you please explain how does this figure come?

    reply
  20. Israel June 1, 2018

    Down to earth explanation of Marginal Relief.Very Easy easy to understand.Thank you

    reply

Leave a Comment