Complete guide of Marginal Relief in income tax
This post teaches you to understand the concept of the marginal relief, steps to work out it and simple trick to determine marginal relief
So let’s first see concept and steps to calculate
1.
Why Marginal Relief?
The approach of marginal relief is a design to give relaxation
from the levy of surcharge to a taxpayer where total income exceeds marginally above
the various relevant limits.
2. When it is available?
It is available when the difference between tax payable on
total income and tax payable on the threshold limit is higher than the amount
of enhanced income.
However, it is available to the extent of the original amount
of surcharge.
For Ex. Mr a has a total income of Rs. 50,10,000
Here threshold limit for surcharge is 50,00,000, enhanced
income is 10000
Therefore, if the difference between a tax on 50,10,000
including surcharge and tax payable on 5000000 is more than Rs. 10,000 than
marginal relief is available (Refer example no. 1)
That is marginal relief available only if the increase in tax
amount is more than an increase in income (Refer example no. 2)
3. To whom it’s available?
It is
available to all Assesse to whom surcharge applicable.
4. Rate of surcharge for different
assessee
a.
Surcharge for Individual/HUF/AOP/BOI/Artificial
Juridical person for F.Y 2019-20
|
Particular
|
Surcharge
|
|
Income above Rs. 50 lakh but below
Rs. 1 Crore
|
10%
|
|
Income above Rs. 1 Crore but below
Rs. 2 Crore
|
15%
|
|
Income above Rs. 2 Crore but below
Rs. 5 Crore
|
25%
|
|
Income above Rs. 5 Crore
|
37%
|
Note: The enhanced surcharge of 25%
& 37% is not levied, from income chargeable to tax
under
Section 111A (Short term capital
gain)
Section 112A (Long term capital gain)
and
Section 115AD (Income of Foreign Institutional Investors from
securities or capital gains.
Hence, the maximum rate of surcharge on tax payable on such
incomes shall be 15%.
b.
Surcharge for Company for F.Y 2019-20
|
Particular
|
Surcharge
|
|
Company’s net income above Rs. 1
Crore but less than Rs. 10 Crore
|
7%
|
|
Company’s net income above Rs. 10
Crore
|
12%
|
c.
Surcharge for
partnership firm/LLP/ Local authority/Co-op Society for F.Y 2019-20 ===è 12% if income increase Rs. 1 crore
5. Steps to find marginal relief
Method no. 1
First
check whether surcharge applicable, if yes, then follow the subsequent steps,
and if not then there is no question of marginal relief.
i.
Find out a tax on total income
ii.
Find out tax on applicable
threshold limit
iii.
Find the amount in excess of the applicable
threshold limit
iv.
Marginal relief difference between
step i, step ii and step iii
Note:
-
·
For
calculating marginal relief the tax amount to be calculated before health and
education cess
·
Amount of
marginal relief is deducted from the actual amount of surcharge and balance
amount is added to the tax amount
Let’s understand with a few examples
Example
no. 1
Mr. Naitik (Age 30) has taxable income from
business and profession of Rs. 50,50,000.
Calculate the amount of tax payable by
Mr. X, also calculate Marginal relief if available.
Answer
Here Mr. Naitik has income more than Rs. 50,00,000
therefore surcharge at a rate of 10% is applicable
Marginal
relief is available if the surcharge is more than Rs. 50000 (total income –
threshold income)
|
Particular
|
Amount
|
|
Tax on 50,50,000 (112500+ 30% of 4050000)
|
13,27,500
|
|
Surcharge = 132750 – 97,750 (see note 1)
|
35,000
|
|
|
13,62,500
|
|
Add: Health & education cess
|
54,500
|
|
Total
tax payable
|
14,17,000
|
Note
1 Calculation of marginal relief
|
Particular
|
Amount
|
|
Tax on 50,50,000 (112500+
30% of 4050000)
|
13,27,500
|
|
Surcharge @ 10% = 132750
|
1,32,750
|
|
(i)
Tax on total income
|
14,60,250
|
|
|
|
|
Tax on threshold limit
50,00,000 (112500+30% of 40,00,000) = 13,12,500
|
|
|
(ii)
Tax on threshold limit
|
13,12,500
|
|
(iii)
Increase in income(5050000-500000)
|
50,000
|
|
Marginal relief (i-ii-iii)
|
97750
|
Example
no. 2
If in example no. 1
Taxable income of Mr. Naitik is 55,00,000
Calculate the amount of
tax payable by Mr. Naitik
Answer
Increase in income =
(60,00,000-50,00,000)=10,00,000
|
Particular
|
Amount
|
|
Tax on 55,00,000 (112500+ 30% of 45,00,000)
|
14,62,500
|
|
Surcharge @ 10 %
(Marginal relief not available as increase
in income is more than surcharge amount)
|
1,46,250
|
|
|
16,08,750
|
|
Add : Health & education cess @ 4%
|
64,350
|
|
Total tax payable
|
16,73,100
|
Example
no. 3
Mr. Vishal (Age 30) has taxable income from
business and profession of Rs. 1,01,00,000.
Calculate the amount of tax payable by
Mr. X, also calculate Marginal relief if available.
Answer
Here Mr. Vishal has income more than Rs. 1,00,00,000
therefore surcharge at a rate of 15% is applicable
Marginal
relief is available if the surcharge is more than Rs. 1,00,000 (total income –
threshold income)
|
Particular
|
Amount
|
|
Tax on 1,01,00,000 (112500+ 30% of
91,00,000)
|
28,42,500
|
|
Surcharge @15%= 4,26,375 – 75,125 (see note
1)
|
3,51,250
|
|
|
31,93,750
|
|
Add: Health & education cess
|
1,27,750
|
|
Total tax payable
|
33,21,500
|
Note
1 Calculation of marginal relief
|
Particular
|
Amount
|
|
Tax on 1,01,00,000
(112500+ 30% of 91,00,000)
|
28,42,500
|
|
Surcharge @ 15%
|
4,26,375
|
|
(i)
Tax on total income
|
32,68,875
|
|
|
|
|
Tax on threshold limit 1,00,00,000
(112500+30% of 90,00,000) = 28,12,500 + 2,81,250 (10% surcharge)
|
|
|
(ii)
Tax on threshold limit
|
30,93,750
|
|
(iii)
Increase in income(1,01,00,000-1,00,00,000)
|
1,00,000
|
|
Marginal relief (i-ii-iii)
|
75,125
|
Now let’s see Simple trick for calculating Marginal relief
Method
no. 2
In
this method just follow the easy Formula
Marginal relief =
 |
| Marginal relief Formula |
Note: - If in the above formula result comes to a
negative amount, then it shows that no marginal relief is available.
Now
if we apply this formula in Example no. 1 then
Surcharge on 50,50,000 – Surcharge on 50,00,000 –
70% of 50,000
= 1,32,750 – 0 – 35,000
= 97,750 (Marginal relief)
Now
apply this formula in Example no. 2 then
Surcharge on 55,00,000 – Surcharge on 50,00,000 –
70% of 5,00,000
=1,46,250 – 0 – 3,50,000
=
Negative amount, Marginal relief = 0
Apply
this formula in Example no. 3
Surcharge on 1,01,00,000 – Surcharge on
1,00,00,000 – 70% of 1,00,000
= 4,26,375 – 2,81,250 – 70,000
=75,125 (Marginal relief)
Now let’s take one complicated example for better understanding
Example
no. 4
Mr. Bholu (age 25)
has a following income in the F.Y 2019-20
1.
Income from business & profession – 1,62,00,000
2.
Long term Capital gain on sale of share u/s 112A – 1,50,000
3.
Other long term capital gain chargeable @ 10% - 20,00,000
4.
Other long term capital gain chargeable @ 20% - 4,00,000
5.
Short term capital gain on sale of share u/s 111A – 50,000
6.
Short term capital gain other than u/s 111A – 15,00,000
Calculate income tax payable and marginal relief.
Method
1
Analysis:
·
As per the provision of the income
tax act if a person having income chargeable to tax u/s 112A, 111A and 115AD
then on such income surcharge cannot be levied more than 15%
·
Here Mr. Bholu has total income is
2.03 crore therefore applicable surcharge rate is as follow
On 2,01,50,000 @ 25% (Income other
than 112A & 111A is more than 2 Crore)
On 2,00,000 @ 15% ( 1,50,000 +
50,000 )
Answer
|
Particular
|
Amount
|
|
Income
Chargeable at Slab rate 1,77,00,000
|
|
|
Tax on income from business &
profession + Short term capital gain other than u/s 111A
1,62,00,000+15,00,000 = (112500+ 30% of 1,67,00,000)
|
51,22,500
|
|
Income
Chargeable at Special rate 26,00,000
|
|
|
Long term capital gain @ 20% (4,00,000*20%)
|
80,000
|
|
Long term capital gain @ 10% (20,00,000*10%)
|
2,00,000
|
|
Tax on 2,01,00,000
|
54,02,500
|
|
Long
term capital gain u/s 112A @ 10% in excess of Rs 1,00,000 (1,50,000-1,00,000)*10%
= 5,000
|
|
|
Short term capital gain @ 15% (50,000 *
15%) = 7500
Tax on Remaining 2,00,000
|
12,500
(5000+7500)
|
|
Add : Surcharge (54,02,500*25%
+ 12,500*15%) = 13,52,500
Less :
Marginal relief = 3,43,750
(13,52,500-3,43,750)
|
10,08,750
|
|
|
64,23,750
|
|
Add: Health & Education cess @ 4%
|
2,56,950
|
|
Total tax payable
|
66,80,700
|
Note
1 Calculation of marginal relief
|
Particular
|
Amount
|
|
Tax on 2,01,00,000
(54,02,500 + 25 % surcharge 13,50,625)
|
67,53,125
|
|
Tax on 2,00,000 (12,500 + 15%
surcharge 1875)
|
14,375
|
|
(i)
Tax on total income
|
67,67,500
|
|
|
|
|
Tax on threshold limit
2,00,00,000
26,00,000 @ special rate
= (80,000 + 2,00,000 + 12,500) = 2,92,500
as per above calculation
Remaining 1,74,00,000 (2
crore-26 Lakh) @ Slab rate = (112500+30% on 1,64,00,000) = 50,32,500
Total tax (2,92,500+50,32,500)
= 53,25,000+ 7,98,750 (15% surcharge)
= 61,23,750
|
|
|
(ii)
Tax on threshold limit
|
61,23,750
|
|
(iii)
Increase in income(2,03,00,000-2,00,00,000)
|
3,00,000
|
|
Marginal relief (i-ii-iii)
|
3,43,750
|
Method
2
Answer
Surcharge on Total income – Surcharge on
threshold limit – 70% of increase income
= surcharge on 2.03 Crore – Surcharge on 2
crore – 70% of 3 Lakh
=(13,50,625+1875) – 7,98,750 – 2,10,000
=
3,43,750 (Marginal
relief)
Hope you clear all your concepts about
Marginal relief, please comment if you have any query regarding this topic
Enjoy your day
Stay home, stay safe
Thank you
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