The concept of a surcharge is simple – it’s an extra tax on your total tax liability if your income exceeds ₹50 lakh. Under the new tax regime, the surcharge is 10% for taxable income above ₹50 lakh up to ₹1 crore, 15% for taxable income above ₹1 crore up to ₹2 crore, and 25% on income above ₹2 crore. In practice, though, it’s anything but simple.
Let’s say Mr A crossed the ₹50 lakh surcharge threshold in FY24. He had an appraisal in May 2023 that increased his taxable income from ₹48 lakh to ₹51 lakh. He was aware that income above ₹50 lakh attracts a 10% surcharge. However, the actual tax outgo still came as a rude shock. His income above ₹50 lakh was just ₹1 lakh, but the surcharge, according to the calculator on the income tax department’s website, turned out to be ₹70,000. That’s because the surcharge applies to the total tax liability and not just the tax on income above ₹50 lakh. That meant 70% of his excess income above ₹50 lakh went towards taxes.
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To be sure, the government offers relief to those whose excess income above ₹50 lakh turns out to be less than the additional tax from the surcharge. However, others pay at least 70% of that excess income in taxes. If your taxable income is just ₹100 more than ₹50 lakh, for instance, the surcharge works out to ₹70.
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An ‘unjust’ system
What happened with Mr A has been a reality for many since the surcharge on income above ₹50 lakh was introduced in 2017. Strategy and finance consultant and IIT-IIM alumnus Dheeraj Singh discovered this the hard way when he was filing his wife’s income tax return. “I realised while filing the ITR that the tax outgo was much higher than what I had paid last year. A good part of her additional income this year was going to taxes,” he said.
“We find it hard to explain to [clients] why this is happening. It is a major challenge.”
The big anomaly here is that the higher your income is above ₹50 lakh, the lower the effective rate of tax on your excess income. For example, a person with ₹60 lakh of taxable income will have to pay a ₹1.5 lakh surcharge, according to the I-T department’s calculator, which works out to 15% of the ₹10 lakh income above ₹50 lakh. But if his taxable income is ₹1 crore, the effective tax on his income above ₹50 lakh works out to just ₹2.7 lakh, or just above 5%.
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Singh said, “This goes against the very concept of the surcharge, which is levied on people with higher incomes. People who earn much more than ₹50 lakh are paying a lower rate of tax against their excess income than those who earn just a little more than ₹50 lakh. It is unjust.”
Chartered accountant Prakash Hegde agreed that people whose taxable income is just above ₹50 lakh have it tough. “We find it hard to explain to them why this is happening. It is a major challenge,” he said.
Possible solutions
Other tax experts Mint spoke to said the government should lower – or even remove – the surcharge for incomes between ₹50 and ₹1 crore, or at the very least for those in the ₹50-60 lakh range.
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Hegde suggested another method for calculating the surcharge. “We suggest bifurcating the tax liability. Calculate tax up to ₹50 lakh of income separately and don’t levy a surcharge on this. The surcharge should be levied on the tax on excess income above ₹50 lakh. For example, if you earn ₹55 lakh, your income of ₹50 lakh attracts a tax liability of ₹12 lakh while an additional ₹5 lakh attracts ₹1.5 lakh tax. Levy 10% surcharge only on ₹1.5 lakh, not on ₹13.5 lakh ( ₹12 lakh + ₹1.5 lakh),” he said.