As per the tax rates applicable for A.Y. 2014-15, 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 | 28,30,000 |
| Surcharge – B | 0 |
| Total Education cess – C | 84,900 |
| Total Income Tax – A+B+C | 29,14,900 |
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 | 28,30,003 |
| Surcharge at 10% of Income Tax without marginal relief – B | 2,83,000 |
| Total Education cess – C | 93,390 |
|
Total Income Tax – A+B+C |
32,06,393 |
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 2,83,003. 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 | 28,52,200 |
| Surcharge (@ 10% of Income Tax) | 2,85,220 |
| Income Tax plus Surcharge | 31,37,420 |
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 31,37,420 (on Rs 1,00,74,000) – 28,30,000 (on Rs 1,00,00,000)= Rs 3,07,420.
In this case, the incremental tax (Rs 3,07,420) 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 28,52,200 (excluding Surcharge)
When the salary is Rs 1 crore the Income Tax amount (excluding Surcharge) is Rs 28,30,000. The incremental Income Tax (excluding Surcharge) = Rs 38,52,200 – Rs 28,30,000 = Rs 22,200.
Since the incremental Income Tax + Surcharge should be Rs 74,000, and Rs 22,000 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 | 28,52,200 |
| Surcharge – B | 52,800 |
| Total Education cess – C | 87,120 |
| Total Income Tax – A+B+C | 29,91,120 |
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 | 28,52,200 |
| Surcharge – B | 52,800 |
| Total Education cess – C | 87,120 |
| Total Income Tax – A+B+C | 29,91,120 |
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 29,91,120, the total incremental tax vis-a-vis that for the annual salary of Rs 1 crore is Rs 76,220 (Rs 29,91,120 – Rs 29,14,900).
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.
Hinote Systems
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