What is Health and Education Cess on Income Tax? Rate, Calculation

Editorial Team
Updated
December 29, 2023

Have you ever experienced a sudden increase in tax liability even though your income increase was insignificant? This is where surcharges come into play, adding jolting bumps to certain income thresholds. But don't worry; the Income Tax Act has a hidden handrail called marginal relief that can help you.

BRIEF SUMMARY

This concept helps reduce the tax burden by smoothing out those jarring jumps. This is particularly helpful when the tax rate is based on the income slab and the applicable tax rate increases with income. So, the next time you find yourself climbing the financial ladder and facing a tax spike, remember that marginal relief can make your ascent a little fairer. Know more about the Income-tax Return Filing.

Tax Savings Simplified: Claim More with the New Section 87A Benefits

Have you ever felt like you’re paying more taxes than you should? The good news is that Section 87A of the Income Tax Act provides a tax rebate to individual taxpayers and Hindu Undivided Families (HUFs). And the latest budget has made some exciting revisions that will benefit you in the new fiscal year. Let’s look at these changes and understand how they can help you under both the old and new tax regimes.

Old Regime: Rebates Up to Rs. 5 Lakh

If you follow the old tax regime and your net taxable income for the financial year 2023-24 is less than Rs. 5 lakh, then you are eligible for a rebate under Section 87A. The good news is that you can claim up to Rs. 12,500, or the total amount of your income tax (whichever is lower). You could have that extra money in your pocket!

New Regime: Boosting the Bar to Rs. 7 Lakh

Great news for those who adopted the new tax regime early! From the assessment year 2024-25, you can claim a rebate under Section 87A even if your net taxable income is Rs. 7 lakh, which is Rs. 2 lakh higher than the old tax regime. You can either keep 100% of your income tax or a maximum of Rs. 25,000 as a rebate. This benefit remains the same as before. Isn’t it great?

Marginal relief from Surcharge

The surcharge applies to individuals whose annual income exceeds Rs 50 lakh and to companies or LLPs whose income reaches Rs one crore. Think of income tax as a ladder, with each rung representing a higher income bracket with its tax rate. Surcharges are like additional spikes added to particular rungs to increase tax contributions for high earners. Now, imagine yourself climbing this ladder. As long as you remain below a specific rung with a surcharge, you can climb usually. However, if you cross that rung by even a small margin, the surcharge will suddenly apply.

This is where marginal relief comes in. It acts like a safety net, preventing the extra spike from hitting you with full force. Instead, it limits the surcharge to only the amount you climbed beyond the rung, ensuring that your tax increase is not disproportionate to your minor income jump. Therefore, instead of feeling the full brunt of the spike, you only pay its weight for the small step you took, making the climb fairer and less jarring.

Suppose an individual has a net taxable income of Rs 51,00,000. As the income exceeds Rs 50 lakh, the surcharge will be applicable at 10%. The tax payable on Rs 51,00,000 (without surcharge) is Rs 13,42,500. The surcharge amount will be Rs 1,34,250.

Here, the surcharge amount (Rs 1,34,250) is higher than the additional income above Rs 50 lakh (Rs 1,00,000). This is where the concept of marginal relief kicks in. The surcharge of Rs 1,34,250 is higher than the additional income of Rs 1 lakh above the Rs 50 lakh limit. Here’s how marginal relief would apply:

Calculate the marginal relief: The relief amount equals the difference between the surcharge payable and the additional income exceeding the limit. In this case, the marginal relief would be Rs 1,34,250 (surcharge) - Rs 1,00,000 (additional income) = Rs 34,250.
Reduce the surcharge by the relief amount: The actual surcharge payable after considering marginal relief would be Rs 1,34,250 (original surcharge) - Rs 34,250 (marginal relief) = Rs 1,00,000.
Calculate the final tax payable: Add the reduced surcharge to the tax payable without surcharge. The final tax payable would be Rs 13,42,500 (tax without surcharge) + Rs 1,00,000 (reduced surcharge) = Rs 14,42,500.

As you can observe, marginal relief offers some much-needed cushioning to taxpayers in certain situations, ensuring their tax burden does not increase disproportionately due to the surcharge. Navigating the complex terrain of income tax can feel like an obstacle course. However, your financial climb can be a little steadier with Section 87A providing increased rebates in the new regime and marginal relief acting as a tax-smoothing handrail. Remember, comprehending these tax benefits can save you significant money, so claim your rightful rebates and climb toward financial freedom with a lighter (and lighter-taxed) backpack!

Conclusion

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