Surcharge and Cess are important part of Income tax computation. Surcharge is introduced in the finance act 2013 whereas Cess is applicable since 2004. Cess is calculated on total income tax and surcharge (if applicable). Surcharge is applicable only if the total income is more than one crore rupees. Cess has two component, Education Cess and Secondary and Higher Education Cess (SHEC). Education Cess is 2% whereas SHEC is 1%, therefore total Cess is 3% of Income tax and surcharge. Computation of Surcharge and Cess on income tax is important while payment of self assessment tax. Therefore proper understanding of Surcharge and Cess is required while filing income tax return.
Calculation of Surcharge on Income Tax
Surcharge is applicable for those tax payers whose total income exceeds one crore rupees. Income of one crore is just the criteria for levy of surcharge, surcharge is not calculated on total income else it is calculated on Income tax on the total income. The rates of surcharge varies from different category of taxpayers. These rates have been increased from year 2013 to year 2016 as per the finance act 2016. For individuals, HUF, Partner ship firm and LLP the surcharge is 12% of the income tax. It means the amount of income-tax shall be increased by a surcharge at the rate of 12% for individuals having total income more than one crore rupees.
Surcharge Rate for Assessment Year 2016-2017
Marginal Relief on Surcharge
The surcharge shall be subject to marginal relief (where income exceeds one crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees)
For Example, if the total income is 1 crore 1 lakh rupees than as per income tax slab the tax payable will be Rs.2855000 + Surcharge of 12% on 2855000 (i.e Rs.342600) therefore total income tax will be Rs.3197600.
Now if the income were only Rs.1 crore then there would have no surcharge and income tax payable would have been Rs.2825000.
The increase in tax payable for income of 1 crore 1 lakh is (3197600-2825000=Rs.372600) whereas the income increased is only 1 lakh. Therefore it is applicable for Marginal relief, and the marginal relief will be (372600-100000) Rs. 272600.
Education CESS Rates
Example of Income Tax Calculations as per FY 2015-2016
Income: 120,00,000 [1 crore twenty lakh]
Income tax: 30% of (120,00,000-10,00,000) =33,00,000
20% of (10,00,000-5,00,000) =1,00,000
10% of (5,00,000-2.50,000) =25,000
Total Income tax payable:Rs. 34,25,000
Surcharge: 12% of 34,25,000 = Rs. 4,11,000
Income Tax including Surcharge = 38,36,000
Increase in Tax due to increased income of 20 lakh (38,36,000-28,25,000)=Rs. 10,11,000
Less on surcharge (marginal relief) =Nil (since increased tax is less than increased income)
Final Income Tax +Surcharge =Rs.38,36,000
Edu. Cess @2%+ SHEC Cess@1% on income tax and surcharge=Rs. 1,15,080
Total Income tax = 39,51,080