What is surcharge on income tax? Here's how you can calculate it

Calculating tax has always been an uphill task. From the classification of income to the determination of tax rate, the process can be quite challenging, especially for those who don't love number crunching. Another challenging level in tax computation could be how to calculate a surcharge. This is because the surcharge rate differs from person to person according to the amount and type of income. To help you understand, here is a low down on how to calculate a surcharge on income tax.
First things first. What is a surcharge? The surcharge amount is calculated on the tax before adding a cess to it. It is levied to put a high tax burden on rich people. It becomes a part of the Consolidated Fund of India and can be utilised for any purpose by the government. One of the biggest differences between surcharge and cess is the central government is not required to share the surcharge amount with state governments.

How much is the surcharge rate? The important point to note is that it is calculated on the basic tax. For individuals, the surcharge rate is 10 per cent of the tax amount for income from Rs 50 lakhs but not exceeding Rs 1 crore. The rate goes higher with the increase in income. Hence, for income exceeding Rs 1 crore but not exceeding Rs 2 crore, it is levied at 15 per cent of the tax amount. The next slab starts for income exceeding Rs 2 crores but not exceeding Rs 5 crores where a surcharge is computed at 25 per cent of the tax amount. For income exceeding Rs 5 crore surcharge is as high as 37 per cent of the tax amount.

Is the surcharge calculation different for different incomes? Yes, there are at present, different surcharge rates for an individual and corporates depending on the level of income.

“For corporates, in the case of a foreign company, if income is exceeding Rs 1 crore but not exceeding Rs 10 crores– 2 per cent of the tax amount and in case of income exceeding Rs 10 crores – 5 per cent of the tax amount. In the case of a domestic company, where the total income of a domestic company is more than Rs. 1 crore but does not exceed Rs 10 crores, a surcharge of 7 per cent is levied on the tax, and in case of income exceeding Rs 10 crores – 12 per cent of the tax amount,” says Yeeshu Sehgal, Head of Tax Market, AKM Global, a tax and consulting firm.

Points to keep in mind while calculating the surcharge

The surcharge rate varies from income to income. The maximum rate of surcharge on the long-term capital gains of any type of asset is 15 per cent.

“This maximum capping of the surcharge was implemented in the Union Budget 2022. In the case of short-term capital gains, surcharge rates vary depending on the income level and as per the applicable slab rate to a taxpayer. The surcharge rate is always calculated on the tax amount and not on income,” says Sehgal.

Sehgal explains, for example, Mr. A has received a salary of Rs 6 crore annually and LTCG from the sale of equity shares is Rs 4 crore 50 lakhs where the STCG from the sale of gold is Rs10 lakhs. His tax computation will be as follows:

Salary income – Rs. 6,00,00,000

LTCG from the sale of listed equity shares – Rs. 4,50,00,000

STCG from the sale of gold – Rs. 10,00,000

His total income (adding all the above) is Rs. 10,60,00,000.

Income that is liable for the normal tax rate is Rs. 6,10,00,000 (salary + short-term capital gains).

Income which is liable for the special tax @10 per cent is Rs. 4,50,00,000 (long-term capital gains)

Total income tax would be Rs 2,26,02,500 (as per the applicable slab rates)

The surcharge shall be calculated as follows: 37% of the tax amount on the normal income and 15 per cent (maximum capping) on tax on long-term capital gains, the total surcharge would be Rs 73,75,125.

Also read: Govt on track for bumper tax collections this fiscal year