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What is marginal relief and how it is computed?

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What is marginal relief and how it is computed?. The concept of marginal relief is designed to provide relaxation from levy of surcharge to a taxpayer where the total income exceeds marginally above Rs. 1 crore or Rs. 10 crore, as the case may be. Thus, while computing surcharge, in case of taxpayers (other than a company) having total income of more than Rs. 1 crore, marginal relief shall be available in such a manner that the net amount payable as income-tax and surcharge shall not exceed the total amount payable as income-tax on total income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore.

In case of a company, surcharge is levied @ 7% (2% in case of foreign company) on the amount of income-tax if the total income exceeds Rs. 1 crore but does not exceed Rs. 10 crore and @ 12% (5% in case of foreign company) on the amount of income-tax if total income exceeds Rs. 10 crore. Hence, in case of company whose total income exceeds Rs. 1 crore but does not exceeds Rs. 10 crore, marginal relief will be computed as discussed above, but in the case of company having total income above Rs. 10 crore marginal relief is available in such a manner that the net amount payable as income-tax and surcharge shall not exceed the total amount payable as income-tax and surcharge on total income of Rs. 10 crore by more than the amount of income that exceeds Rs. 10 crore.

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Illustration for better understanding

Mr. Raja is businessman (age 35 years). His total income for the year 2015-16 amounted to Rs. 1,01,00,000. Will he be liable to pay surcharge, if yes, then how much and will he get the benefit of marginal relief?

Surcharge is additional tax levied on the amount of income-tax. In case of taxpayers other than company, surcharge is levied @ 12% on the amount of income-tax where the total income of the taxpayer exceeds Rs. 1 crore. In this case, total income of Mr. Raja exceeds Rs. 1 crore and hence he will be liable to pay surcharge. Marginal relief is available in cases where the total income is slightly above Rs. 1 crore. The computation of normal tax liability (i.e. liability without marginal relief) and tax liability under marginal relief (i.e. liability after marginal relief) will be as follows :

(1) Normal tax liability (i.e. without marginal relief)

Tax on total income before surcharge (*) 28,55,000
Add: Surcharge (@ 12% on the amount of income-tax of Rs. 28,55,000)   3,42,600
Tax liability after surcharge (i.e., normal tax liability) 31,97,600

(*) The normal tax rates for the financial year 2014-15 applicable to an individual below the age of 60 years are as follows :

  • Nil upto income of Rs. 2,50,000
  • 10% for income above Rs. 2,50,000 but upto Rs. 5,00,000
  • 20% for income above Rs. 5,00,000 but upto Rs. 10,00,000
  • 30% for income above Rs. 10,00,000.

Apart from above rates, cess will be computed separately.

(2) Tax liability under marginal relief (i.e. after marginal relief)

Tax on Rs. 1 crore (at the above discussed rates) 28,25,000
Add: Income above Rs. 1 crore   1,00,000
Tax liability under marginal relief 29,25,000

Conclusion

Normal tax liability (i.e. without marginal – relief) comes to Rs. 31,97,600 and tax liability under marginal relief comes to Rs. 29,25,000. It can be observed that tax liability under marginal – relief is lower and, hence, Rs. 29,25,000 will be the tax liability before cess. Total tax liability will be computed as follows :

Rs.
Tax liability after marginal – relief (*) 29,25,000
Add: Education cess @ 2% 58,500
Add: Secondary and higher education cess @ 1%     29,250
Tax liability 30,12,750

(*) In this case, surcharge paid by Mr. Raja will be Rs. 70,000 computed as follows :

Rs.
Tax liability (before cess) on Rs. 1,01,00,000 after considering the provisions of marginal relief 29,25,000
Tax liability (before cess) at normal rates on Rs. 1,01,00,000 if surcharge is not levied 28,55,000
Surcharge (i.e. increase in tax liability) 70,000

Illustration for better understanding

Mr. Karan is a businessman (age 35 years). His total income for the year 2015-16 amounted to Rs. 1,06,00,000.Will he be liable to pay surcharge, if yes, then how much and will he get the benefit of marginal-relief?

Surcharge is additional tax levied on the amount of income-tax. In case of taxpayers other than company surcharge is levied @ 12% on the amount of income-tax where the total income of the taxpayer exceeds Rs. 1 crore. In this case, total income of Mr. Karan exceeds Rs. 1 crore and hence he will be liable to pay surcharge. Marginal relief is available in cases where the total income is slightly above Rs. 1 crore. The computation of normal tax liability (i.e. liability without marginal-relief) and tax liability under marginal relief (i.e. liability after marginal relief) will be as follows :

(1) Normal tax liability (i.e., without marginal-relief)

Tax on total income before surcharge (*) 30,05,000
Add: Surcharge (at 12% on the amount of income-tax of Rs. 29,80,000)   3,60,600
Tax liability after surcharge (i.e., normal tax liability) 33,65,600

(*) Tax rates are discussed in previous illustration.

(2) Tax liability under marginal-relief  (i.e. after marginal relief)

Tax on Rs. 1 crore (at the rates discussed in previous illustration) 28,25,000
Add: Income above Rs. 1 crore   6,00,000
Tax liability under marginal-relief 34,25,000

Conclusion

Normal tax liability (i.e. without marginal-relief) comes to Rs. 33,65,600 and tax liability under marginal relief comes to Rs. 34,25,000. It can be observed that normal tax liability (i.e. without marginal-relief) is lower and, hence, Rs. 33,65,600 will be the tax liability before cess. Total tax liability will be computed as follows :

Rs.
Normal tax liability i.e. tax liability after surcharge of Rs. 3,60,600 33,65,600
Add: Education cess @ 2% 67,312
Add: Secondary and higher education cess @ 1% 33,656
Tax liability 34,66,568​
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About Raju Choudhary

Article by Raju Choudhary Raju has written 537 articles. If you like This post, you can follow CAknowledge on Twitter. Subscribe to CAknowledge feed via RSS or EMAIL to receive instant updates.

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