Income Tax Surcharge Rates & Marginal Relief

What is Surcharge on Income Tax?

A surcharge on income tax is an additional charge levied on top of the regular income tax for individuals and entities with higher taxable incomes. Essentially, it’s a way for the government to collect more tax from high-income earners. The surcharge is calculated as a percentage of the total income tax liability and applies when your income exceeds a specified threshold.

For example, if your taxable income is ₹1 crore, a surcharge will be added to the base income tax you owe. This surcharge increases progressively as your income rises.
 

Surcharge Rates for Different Taxpayers

The income tax surcharge rates vary depending on the taxpayer category and the tax regime (old or new). Budget 2023 introduced a major change by reducing the highest surcharge rate from 37% to 25% under the new tax regime, which remains unchanged in Budget 2025.

Surcharge Rates for Individual Taxpayers

Surcharge Rates for Domestic Companies

Surcharge Rates for Foreign Companies

Surcharge on Firms, LLPs, and Local Authorities

If the total income exceeds ₹1 crore, a surcharge of 12% of the income tax payable is applicable.

Surcharge on Long-Term Capital Gains

The surcharge on long-term capital gains (LTCG) from the sale of listed equity shares, mutual fund units, etc., has been capped at 15%.

Surcharge on TDS on Sale of Property by NRI

When an NRI sells property in India, the applicable TDS includes a surcharge based on the sale amount. The surcharge rate is calculated as per the income slab applicable to the NRI's total income. This can range from around 10 to 20% on income exceeding ₹50 lakhs.
 

Budget Update for Surcharge on Income Tax Calculation

The Budget 2023 reduced the highest surcharge rate under the new tax regime from 37% to 25%, a significant relief for high-income earners. This change remains in effect for FY 2025-26. Additionally, for AOPs (Association of Persons) with only corporate members, the surcharge rate is capped at 15%.

What is Marginal Relief?

Marginal relief is a provision under Section 87A of the Income Tax Act that prevents a steep increase in tax liability when income marginally exceeds a threshold limit. It ensures that the additional tax payable due to a surcharge does not exceed the incremental income.

In simple terms, if your income exceeds ₹12 lakh or ₹50 lakh by a small margin, marginal relief ensures that the extra tax you pay is not more than the extra income earned.
 

Marginal Relief for Individuals

Let’s understand this with the help of an example. Suppose an individual earns income between ₹50 Lakh and ₹1 Crore.

• A surcharge of 10% is applicable on (net) income above ₹50 lakh.
• Marginal relief ensures that the total tax payable (including surcharge) on an income just above ₹50 lakh does not exceed the actual surplus income.

Example:

• Total income = ₹51 lakh
• Tax liability (including surcharge) = ₹14,76,750
• Tax on ₹50 lakh (without cess) = ₹13,12,500
• Extra income = ₹1 lakh
• Excess tax payable = ₹1,64,250

In this scenario, the individual is earning ₹1 lakh extra but is paying tax more than the earned amount. Since the extra tax payable exceeds the additional income, marginal relief of ₹64,250 (₹1,64,250 – ₹1 lakh) will be provided.

Scenario 2: Individual Earning Income Between ₹1 Crore and ₹2 Crore

• A surcharge of 15% applies to incomes above ₹1 crore.
• Marginal relief ensures that the excess tax payable over ₹1 crore does not exceed the additional income earned.

Example:

• Total income = ₹1.01 crore
• Tax liability (including surcharge) = ₹32,68,875
• Tax on ₹1 crore = ₹30,93,750
• Extra income = ₹1 lakh
• Excess tax payable = ₹1,75,125

Marginal relief of ₹75,125 will reduce the total tax payable.
 

Marginal Relief for Companies

• For domestic companies with an income between ₹1 crore and ₹10 crore, a 7% surcharge applies.
• For foreign companies, a 2% surcharge applies for income in the same range.
• Marginal relief ensures that the additional tax on higher income does not exceed the extra income earned.
   

Marginal Relief in New Tax Regime

Budget 2024 extended marginal relief in new tax regime. Now, marginal relief applies to incomes exceeding ₹12 lakh but not surpassing ₹12.75 lakh. This is a key change in the income tax changes in the budget, helping taxpayers reduce their tax liability under the new regime.

Marginal Relief on Surcharge in Old Tax Regime

Marginal relief also applies to the surcharge in the old tax regime. It ensures that the tax increase due to the surcharge does not exceed the extra income earned.

For instance, if your income rises from ₹50 lakh to ₹50.1 lakh, marginal relief will reduce the surcharge impact, ensuring that the additional tax payable does not exceed ₹10,000 (the extra income).
 

How Marginal Relief Works for Income Just Above ₹12 Lakh

Marginal relief is most relevant when your income slightly exceeds the ₹12 lakh mark, which would otherwise push you into a higher tax bracket.

For example, if your income exceeds ₹12 lakh by ₹10,000, the maximum additional tax you’ll need to pay is ₹10,000. Marginal relief is available only for incomes up to ₹12.75 lakh. Once your income crosses this limit, normal tax rates will apply without any relief.
Let’s take an example to understand this.

Scenario:
Manish’s gross taxable income = ₹14,00,000
After deductions (standard deduction + NPS contribution) = ₹1,75,000
Net taxable income = ₹12,25,000
 

Tax Liability Without Marginal Relief

To understand the importance of marginal relief, let's first look at a scenario where no relief is available. Suppose has a taxable income of ₹12.25 lakh in a financial year. His tax liability would be calculated based on the applicable slab rates under the new tax regime:

• On the first ₹4 lakh – No tax
• On the next ₹4 lakh (₹4,00,001 to ₹8,00,000) – 5% = ₹20,000
• On the next ₹4 lakh (₹8,00,001 to ₹112,00,000) – 10% = ₹40,000
• On the next ₹4 lakh (₹12,00,001 to ₹12,25,000) – 15% = ₹3,750

Thus, the total tax payable would be:
 ₹20,000 + ₹40,000 + ₹3,750 = ₹63,750 

Without marginal relief, Manish would owe ₹63,750 in taxes, excluding the 4% cess. 
 

Tax Liability With Marginal Relief

Marginal relief ensures that the additional tax payable does not exceed the extra income earned. In Manish’s case, his incremental income over ₹12 lakh is ₹25,000. Therefore, the extra tax payable should be capped at ₹25,000.

Here’s how marginal relief adjusts the calculation:

• Incremental income over ₹12 lakh = ₹25,000
• Excess tax payable without relief = ₹63,750 – ₹0(tax on ₹12 lakh) = ₹63,750
• Marginal relief applied = ₹25,000 

After applying marginal relief, Manish’s tax liability would be reduced to:
 ₹25,000 (incremental tax capped at extra income)

Without marginal relief, Manish would have paid ₹63,750. With marginal relief, his total liability drops to ₹25,000.
Comparison: Tax With and Without Marginal Relief

To see how marginal relief affects tax liability across different income levels, let’s compare the tax payable with and without marginal relief:

The table clearly shows how marginal relief prevents a steep rise in tax liability when income marginally exceeds ₹12 lakh.
 

Who Can Claim Marginal Relief?

Marginal relief is designed to prevent taxpayers from being penalized for minor increases in income. It applies to:

• Resident Individuals – Both salaried and non-salaried taxpayers are eligible.
• High-Income Earners – If your income exceeds ₹12 lakh but remains below ₹12.75 lakh, you can claim relief.
• Old and New Tax Regime – Marginal relief applies in both regimes, but the calculation method differs slightly.

Not Eligible for Marginal Relief:

• Non-residents
• Hindu Undivided Families (HUFs)
   

Why Marginal Relief Matters for Taxpayers

Marginal relief provides significant benefits for middle and high-income earners, ensuring that small increases in income don’t lead to disproportionately high tax payments. Here’s why it matters:

Prevents Unfair Tax Increases – Without marginal relief, even a small increase in income could trigger a large surcharge, increasing tax liability substantially.

Encourages Higher Earnings – Taxpayers are more likely to seek higher income opportunities without the fear of losing most of it to taxes.

Supports Financial Planning – With a predictable tax structure, individuals can better plan their savings, investments, and expenses.