Do you know that on a particular portion of your income, the quantum of tax levied on income is higher than the quantum of such income? 

No. Then let’s understand the concept of income-tax rates in India, marginal relief and the inconsistency in the provisions of the Income-tax Act, 1961 while providing the relief to the taxpayer.

Income-tax rates for Financial Year 2019-20

The Indian income tax regime levies tax on income at progressive rates. Under the present model, the income-tax rates for financial year 2019-20 is specified in the Part 1 of the First Schedule of Finance Act 2019 which are as follows:

A. If age of individual is less than 60 years as on 31 March 2020:

Slab Rate Rate
Up to Rs. 2,50,000 Nil
Rs. 2,50,000- Rs. 5,00,000 5%
Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

B. For a resident individual having age 60 years or more but less than 80 years as on 31 March 2020:

Slab Rate Rate
Up to Rs. 3,00,000 Nil
Rs. 3,00,000 – Rs. 5,00,000 5%
Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

C. For a resident assessee having age 80 years or more as on 31 March 2020:

Slab Rate Rate
Up to Rs. 5,00,000 Nil
Rs. 5,00,000- Rs. 10,00,000 20%
Above Rs. 10,00,000 30%

Tax calculated as per above slab rates will be further increased by a surcharge (10% of income tax if total income exceeds INR 50 lacs but upto 1 crore and 15% of income tax if total income exceeds INR 1 crore) and such total income-tax & surcharge will be further increased by Health & Education Cess which is levied at 4% on such total tax and surcharge.

Surcharge and Marginal Relief

In common parlance, surcharge is an additional levy on higher income bracket group i.e. people who earn more will contribute more taxes towards nation’s revenue. Now, let’s understand when surcharge is levied and how the same is computed with the help of below examples.

Mr. A, B, C and D, salaried individuals (less than 60 year of age). Their total income for financial year 2019-20 are respectively 5000000, 5100000, 5195895 and 5207826. Please refer below table for the calculation of surcharge and marginal relief.

Individual A B C D
Net Income (after all deduction/exemptions)  5,000,000  5,100,000  5,195,895  5,207,826
Tax on above as per slab rate (i)  1,312,500  1,342,500  1,371,269  1,374,848
Surcharge @ 10% or 15% (as applicable) (ii)             –     134,250     137,127     137,485
Amount of marginal relief (iii)             –        (64,250)              –             –  
Health & Education cess @ 4% (iv)       52,500       56,500  60,335.80  60,493.30
Total tax liability (v)  1,365,000  1,469,000  1,568,731  1,572,826

Since the surcharge is applicable on income exceeding 50 lacs, no surcharge is applicable in case of individual ‘A’. For individuals with income exceeding 50 lacs, applicable surcharge (ii) is calculated on the tax (i) above.

For individuals having income exceeding 50 lacs but less than 5,195,895, the quantum of tax and surcharge collectively is higher than the income in excess to 50 lacs and thus, marginal relief is available to the taxpayer.

Inconsistency in the provisions of Income-tax Act, 1961

The advent of the concept of marginal relief was dated back in year 2000. As per the provisions of Finance Act 2000, “the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax on such income by more than the amount of income that exceeds such income”.

Subsequently with Finance Act, 2004 and Finance Act, 2007, education cess and secondary & higher education cess were introduced respectively. Nevertheless, no amendment was made in the provision of marginal relief to mitigate the impact of cess.

As a result, there is a portion of income on which the quantum of tax levied is higher than the quantum of income because the concept of marginal relief is not extended to health & education cess. Let’s extend the above examples to the next level.

Individual A B C D
Net Income (after all deduction/exemptions)  5,000,000  5,100,000  5,195,895  5,207,826
Tax on above as per slab rate (i)  1,312,500  1,342,500  1,371,269  1,374,848
Surcharge (as applicable) (ii)             –     134,250     137,127     137,485
Amount of marginal relief (iii)             –        (64,250)              –             –  
Health & Education cess @ 4% (iv)       52,500       56,500  60,335.80  60,493.30
Total tax liability (v)  1,365,000  1,469,000  1,568,731  1,572,826
Total income after tax (vi) 3,635,000 3,631,000 3,627,164 3,635,000
Impact (vii) 0 -4,000 -7,836 0

Upon analysis of above example, the income group between 50 lacs to 5,195,895 are though getting marginal relief but they are losing on the net income after tax on account of exclusion of health & education cess from marginal relief concept. Once the individual crosses the income level of 5,207,826, there will surely be an increase in the net income of the individual.

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Location: Gurgaon, Haryana, IN
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