When your income rises, your tax liability does not just increase because of higher slab rates. The government may also levy an additional charge called surcharge on the payable income tax. Many taxpayers discover this only when their total tax bill suddenly jumps after crossing ₹50 lakh or ₹1 crore.
At the same time, the Income Tax Act contains a built-in safeguard called marginal relief, which ensures that a small increase in income does not lead to a disproportionately large increase in tax liability.
This comprehensive guide explains how surcharge on income tax works, why marginal relief exists, and how proper planning with a tax planner or tax consultant can make a meaningful difference to your tax outgo.
Understanding the Concept of Surcharge on Income Tax
Surcharge on income tax is not a separate tax on income. It is an additional charge levied on the income tax amount once your total income crosses specified limits. The logic behind it is straightforward: as income rises significantly, the government imposes an extra percentage on the calculated tax to make the system more progressive.
In practice, you first compute your income tax according to the applicable slab rates. Once you determine that figure, you check whether your total income exceeds ₹50 lakh. If it does, surcharge on income tax becomes applicable. Only after adding the surcharge do you apply the 4% Health and Education Cess.
Many taxpayers mistakenly assume that surcharge applies to the income itself. It does not. It applies only to the calculated tax amount.
Current Surcharge Rates for Individuals
As per the provisions applicable for Financial Year 2025–26 (Assessment Year 2026–27), surcharge rates differ slightly depending on whether you opt for the old tax regime or the new tax regime.
Under both regimes, surcharge begins once total income exceeds ₹50 lakh. The applicable rates are:
| Total Taxable Income | Old Tax Regime Surcharge Rate | New Tax Regime Surcharge Rate |
| Up to ₹50 lakh | Nil | Nil |
| Above ₹50 lakh up to ₹1 crore | 10% | 10% |
| Above ₹1 crore up to ₹2 crore | 15% | 15% |
| Above ₹2 crore up to ₹5 crore | 25% | 25% |
| Above ₹5 crore | 37% | 25% (capped) |
The difference arises at income above ₹5 crore. Under the old regime, surcharge on income tax rises to 37%. Under the new regime, it is capped at 25%. This cap under the new regime significantly reduces the maximum effective tax rate for ultra-high-income taxpayers.
After applying the relevant surcharge, you must add 4% Health and Education Cess on the enhanced amount.
Surcharge Cap on Dividend and Certain Capital Gains
At first glance, surcharge on income tax can look intimidating, especially under the old tax regime, where it can go as high as 37% for income above ₹5 crore. Naturally, investors often worry that their equity gains or dividend income could face this highest surcharge rate.
However, the law provides an important safeguard: For dividend income and specific capital gains, namely short-term capital gains under Section 111A and long-term capital gains under Section 112A, surcharge on income tax is capped at 15%. This cap applies even if your total taxable income exceeds ₹2 crore or ₹5 crore.
In practical terms, this means that equity-related income does not attract the highest surcharge brackets. While salary, business, or professional income may face surcharge up to 37% under the old regime, eligible capital gains and dividend income will not exceed the 15% surcharge limit.
That said, this cap applies only to the specified components of income. If you earn a mix of business profits, salary, rental income, and capital gains, different portions of your income may attract different surcharge rates. The final computation depends on how your total taxable income is structured. A thoughtful review by a tax planner or tax consultant ensures that surcharge on income tax is applied correctly and that the 15% cap is not overlooked during computation.
Illustration
Consider a total taxable income of ₹6 crore under the old tax regime, where:
- ₹5.5 crore is business income
- ₹50 lakh is Long-term capital gains under Section 112A
Since total taxable income exceeds ₹5 crore, surcharge on income tax is 37% under the old regime. However, the LTCG portion qualifies for the 15% surcharge cap.
1. Tax on Business Income
Business income = ₹5.5 crore
Tax @ 30% = ₹1,65,00,000
Surcharge @ 37% = ₹61,05,000
Subtotal (Tax + Surcharge) = ₹2,26,05,000
2. Tax on LTCG (Section 112A)
LTCG income = ₹50,00,000
Tax @ 10% = ₹5,00,000
Surcharge capped @ 15% = ₹75,000
Subtotal (Tax + Surcharge) = ₹5,75,000
(If 37% surcharge applied, it would have been ₹1,85,000 instead of ₹75,000)
3. Total Before Cess
Business portion = ₹2,26,05,000
LTCG portion = ₹5,75,000
Total tax before cess = ₹2,31,80,000
4. Health & Education Cess @ 4%
4% of ₹2,31,80,000 = ₹9,27,200
5. Final Tax Payable
₹2,31,80,000 + ₹9,27,200 = ₹2,41,07,200
Surcharge on Income Tax for Companies
Surcharge on income tax does not apply only to individuals. Domestic companies and foreign companies are also subject to surcharge once their total taxable income crosses specified limits. However, the surcharge structure for companies is different from that applicable to individuals.
Surcharge Rates for Domestic Companies
| Total Taxable Income | Surcharge Rate |
| Up to ₹1 crore | Nil |
| Above ₹1 crore up to ₹10 crore | 7% |
| Above ₹10 crore | 12% |
- These rates apply to domestic companies taxed under normal provisions (25% or 30% corporate tax rate).
- Companies opting for concessional tax regimes under Sections 115BAA (22%) or 115BAB (15%) are subject to a flat 10% surcharge, irrespective of income level.
- Health and Education Cess @ 4% applies after adding surcharge.
Surcharge Rates for Foreign Companies
| Total Taxable Income | Surcharge Rate |
| Up to ₹1 crore | Nil |
| Above ₹1 crore up to ₹10 crore | 2% |
| Above ₹10 crore | 5% |
Cess @ 4% is added after applying surcharge.
What is Marginal Relief in Income Tax?
The structure of surcharge on income tax creates threshold points. For example, a person earning ₹49.9 lakh pays no surcharge. But the moment income crosses ₹50 lakh, even by a few thousand rupees, a 10% surcharge on the entire tax liability applies. This means that a small increase in income may cause a large jump in tax payable. Without corrective measures, such a structure would be unfair. That is precisely why marginal relief exists.
Marginal relief is a corrective mechanism that ensures the additional tax payable due to surcharge does not exceed the additional income earned beyond the threshold. Put differently, if your income exceeds ₹50 lakh by ₹10,000, your additional tax because of surcharge should not exceed ₹10,000. If it does, marginal relief reduces the excess.
Illustration: How Marginal Relief Works in Practice
Consider two incomes:
Income A: ₹50,00,000
Income B: ₹50,10,000
Excess income: ₹10,000
Suppose tax at ₹50 lakh (including cess, without surcharge) is ₹13,00,000.
At ₹50.10 lakh, after applying surcharge on income tax and cess, suppose the tax becomes ₹14,20,000.
The difference in tax is ₹1,20,000, while the difference in income is only ₹10,000.
Under marginal relief, the tax at ₹50.10 lakh will be restricted to:
Tax at ₹50 lakh + ₹10,000
So the final tax payable becomes ₹13,10,000 (plus cess adjustments as applicable). The excess ₹1,10,000 gets reduced.
This clearly demonstrates how marginal relief prevents the surcharge mechanism from becoming unjust.
The Interaction Between Surcharge and Tax Regime Choice
Choosing between the old and new tax regimes has a significant impact when income crosses ₹5 crore. Under the old regime, surcharge on income tax can go as high as 37%, pushing the effective tax rate beyond 42%. Under the new regime, the surcharge is capped at 25%, reducing the effective maximum rate substantially.
For high-income individuals, this difference alone can influence regime selection. However, deductions available under the old regime may offset the surcharge impact. Therefore, you must perform a detailed comparative analysis before choosing. For complex income structures, a qualified tax planner can help ensure optimal tax liability by structured computation that reveals which regime results in lower overall liability after considering surcharge, cess, deductions, and income composition.
Common Misconceptions About Surcharge and Marginal Relief
Many taxpayers believe that marginal relief eliminates surcharge entirely. That is incorrect. Marginal relief only limits the excess tax over the excess income. Surcharge on income tax still applies, it simply gets moderated at the threshold.
Another misconception is that surcharge applies only to salary income. In reality, it applies to total income, which includes business income, professional income, capital gains, and other taxable receipts.
Some individuals also assume that marginal relief must be separately claimed. In fact, it is part of the computation mechanism. However, incorrect manual calculations often lead to errors, especially in complex income situations.
Conclusion
Surcharge on income tax reflects the progressive nature of India’s tax system. It ensures that individuals with substantially higher incomes contribute proportionately more. However, the sudden jump at threshold levels could create inequity, which is why marginal relief exists as a balancing mechanism.
If your income approaches ₹50 lakh, ₹1 crore, or higher thresholds, you must evaluate the full tax impact rather than relying on slab rates alone. The interaction between surcharge, marginal relief, cess, and tax regime selection can significantly alter your final liability. Consulting an experienced tax consultant or tax planner becomes particularly important in such cases. A professional can compute marginal relief accurately, compare tax regimes, and help you structure income in a compliant and efficient manner.
Understanding these concepts empowers you to make informed financial decisions. When you recognize how surcharge on income tax and marginal relief operate together, you eliminate unpleasant surprises and retain better control over your post-tax income.
