Marginal Relief Under Income Tax Act

Marginal relief restricts your income tax payable to 40% of the difference between your total income and your exemption limit. Where marginal relief is granted, you receive no further credits on your income. Marginal Relief will only be given to you where it is more beneficial than using your tax credits.
Assesses under Income Tax can claim relief from the surcharge, so as to mitigate any additional tax burden which is over and above the actual marginal addition in the income for FY 2020-21. And this relief can be claimed by an assessee when a surcharge gets attracted or increased due to a marginal increase in the net taxable income of the assesses.
According to the Income-tax provisions, a marginal relief will be provided to certain taxpayers up to the amount of the difference between the excess tax payable (including surcharge) on the income above Rs. 50 lakhs and the amount of income that exceeds Rs. 50 Lakhs.

Surcharge on Income Tax

The surcharge is actually a tax that is levied on tax, which means it is an additional tax that is charged on the income tax liability of the assessee which is computed on the basis of the applicable tax slab. Marginal increase in income from a slab where no or lower rate of surcharge is applicable, to a slab where a surcharge is applicable or is applicable at a higher rate, may increase the assessee’s additional tax liability. And this at times becomes even more than the increase in marginal taxable income, due to the application of surcharge or such a higher rate of surcharge.
So, we can say that the marginal relief is prominently meant for providing relief or relaxation from the surcharge, where the net taxable income of taxpayer marginally crosses threshold limit and attracts surcharge or a higher rate of surcharge.
Under cases where the marginal amount payable as ‘income-tax plus surcharge’ exceeds the net marginal amount of increase in total income above the threshold limit, such excess amount of additional tax burden charged on assessee shall be allowed as marginal relief in surcharge, i.e. the amount of surcharge shall be reduced to extent of excess increase in total liability over increase in total income above the threshold limit.

Rates of Surcharge for Different Assessee’s

Marginal Relief from Surcharge for Individuals/ HUFs/ AOPs/ BOIs/ AJPs

Where the total income of the assessee is more than INR 50 Lakhs but does not exceed INR 1 Crore, then the taxpayers have to pay a surcharge at the rate of 10% on the income tax computed as per the Income Tax Act. The total income here means the net income after all possible deductions or the net taxable income of the assessee.
According to the provisions of the Income-tax, a marginal relief will be provided to certain taxpayers up to the amount of the difference between the excess tax payable (including surcharge) on the income above INR 50 lakhs and the amount of income that exceeds INR 50 Lakhs.
Say, an individual has a net taxable income of INR 51 Lakhs during the FY 2020-21.
He will have to pay taxes inclusive of a surcharge at the rate of 10% on the tax computed i.e., the total tax audit payable will be INR 14,76,750 [13,42,500+1,34,250].
But, if he would have earned only INR50 lakhs, then the tax liability would have been INR 13,12,500 only (without surcharge).
Thus, by earning an extra of INR 1,00,000, he will end up paying an income tax of INR 1,64,250. Hence, the individual’s tax liability should be reduced in order to avoid any such excess tax which is payable by him.
The individual will get a marginal relief of the difference amount between the excess tax payable on higher income i.e. (INR 14,76,750 – INR 13,12,500 = INR 1,64,250) and the amount of income that exceeds INR 50 Lakhs i.e. (INR 51,00,000 – INR 50,00,000 = INR 1,00,000).
Thus, the marginal relief will be INR 64,250 (INR 1,64,250 – INR 1,00,000).
Hence, the income tax liability on the net taxable income of the assessee amounting to INR 51,00,000 will be INR 14,12,500, instead of INR 14,76,750.
The same working shall apply to the other scenarios of income exceeding INR 1 Crore but not exceeding INR 2 Crore where 15% surcharge shall be levied and others where 25% and 37% surcharges would be levied or charged.
Marginal Relief for Firms/LLP/Local authorities/Co-operative Society
Where the total income is more than INR 1 Crore for a firm, a surcharge of 12% will be levied on the income tax payable by such an entity. And a  marginal relief will be provided to such taxpayers having a total income of more than INR 1 Crore i.e., the income tax payable (including surcharge) on the higher income should not exceed the income tax payable on INR 1 Crore by more than the amount of income that exceeds INR 1 Crore.
Say, the total income of a firm is INR 1.01 Crores, it will have to pay an income tax including the surcharge of 12% on such tax which has been computed. This means that the total tax payable will be INR 33,93,600 (30,30,000+36,36,00). But, if the total income would have been only INR 1 Crore, then the tax payable would have been INR 30,00,000 only. And by earning an extra INR of 1,00,000, the entity will end up paying income tax of INR 3,93,600 (33,93,600 – 30,00,000)
Hence, the firm will get a marginal relief of the difference amount between the excess tax payable on higher-income i.e. 3,93,600, and the amount of income that exceeds INR1 Crore which is INR 1,00,000 (1,01,00,000 – 1,00,00,000). The marginal relief will be INR 2,93,600 (INR 3,93,600 –  INR 1,00,000), making the tax liability as INR 31,00,000.

Marginal Relief for Companies

When the total income of a domestic company is more than INR 1 Crore but does not exceed INR 10 Crore, a surcharge of 7% will be levied on the income tax payable.
Similarly, for foreign companies having a total income of more than INR 1 Crore but less than INR 10 Crores, surcharge of 2% tax audit will be levied on the income tax payable by such a company.