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  Income Tax For Individuals – Assessment Year 2019–20

Marginal relief for borderline cases
August, 25th 2007

The Government has come to the rescue of high net worth individuals on the borderline from an additional tax liability that goes beyond the income in excess of Rs 10 lakh.

By way of a rule of thumb, the financial world condescends to grant the hallowed status of high net worth (HNW) individuals on those with assets of Rs 5 crore and more. The income-tax law on this touchstone ought to have imposed surcharge of 10 per cent on those having income of Rs 1 crore or more assuming 20 per cent return on wealth to be normal as a rule of thumb.

Be that as it may, for the assessment year (AY) 2007-8, surcharge of 10 per cent is payable if an individuals total income is more than Rs 10 lakh. This effectively hikes the slab rates by a cool 10 per cent for them. Thus the first slab rate of 10 per cent on income in excess of Rs 1 lakh but up to Rs 1.5 lakh practically becomes 11 per cent, the second slab rate on the next Rs 1 lakh becomes effectively 22 per cent as opposed to the normal rate of 20 per cent and the last slab rate that applies on income in excess of Rs 2.5 lakh effectively becomes 33 per cent as against the normal rate of 30 per cent.

Marginal relief

In other words, the normal rates of 10 per cent, 20 per cent and 30 per cent are only for those with a total income of Rs 10 lakh or less. To mitigate the impact of this implicit but effective hike in rates, there is a marginal relief the tax payable by those having a total income of more than Rs 10 lakh would be confined to the normal tax on Rs 10 lakh which works out to Rs 2.5 lakh plus the excess of income over Rs 10 lakh.

To wit, if ones total income is Rs 10.05 lakh, the tax on this works out to Rs 2,51,500 before considering surcharge. The surcharge of 10 per cent on this however takes his gross liability to Rs 2, 76,650 before education cess. He has obviously been done in by his indiscretion, as it were, in earning a total income of just a shade over the lakshman rekha of Rs 10 lakh.

The Government comes to his rescue by confining his tax liability before education cess to Rs 2,55,000. In other words, the impact of the surcharge would not be allowed to extract a tax of more than the income in excess of Rs 10 lakh. He thus gets a marginal relief from his gross tax liability of Rs 2,76,650 of Rs 21,650 so that his tax liability before education cess is reduced to Rs 2,55,000. Fair enough.

Let us take the case of a person having a total income of Rs 10.54 lakh. His tax liability at the normal slab rates works out to Rs 2, 66,200. The surcharge of 10 per cent pushes his gross bill to Rs 2, 92,820.

He is not eligible for the marginal relief because he has an income in excess of Rs 10 lakh of Rs 54,000, whereas the additional amount of tax forked out by him is only Rs 42,820.

The borderline

The raison detre of the regime is to insulate HNW individuals on the borderline from an additional tax liability that goes beyond the income in excess of Rs 10 lakh. And where exactly does the borderline vanish? By process of trial and error, one finds that the cut-off point is the total income of Rs 10,37,310, the tax on which at the slab rates works out to Rs 2,61,193 and surcharge thereon of 10 per cent takes the tax bill before education cess to Rs 2,87,312. His income in excess of Rs 10 lakh is Rs 37,310 and the additional tax on this income as exacerbated by surcharge on the entire income of Rs 37,312 roughly corresponds to the same amount. Therefore he does not get any marginal relief.

It is apparent that the marginal relief starts tapering off. It is, in other words, inversely related to the income in excess of Rs 10 lakh before vanishing completely at the point of Rs 10,37,310.

With salaries on the rise, it is the salaried class more than anybody else which is feeling the heat of this regime because there is no way they can shake off the income in excess of Rs 10 lakh as a businessman can and does through clever accounting. The marginal relief of course brings a wry smile on their faces what the employer giveth, the taxman taketh!

S. Murlidharan
(The author is a Delhi-based chartered accountant.)
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