10% Surcharge on Super Rich (Earning Rs 50 Lakhs or more)

 

10% Surcharge on Super Rich (Earning Rs 50 Lakhs or more)

The Union Budget of 2017 turned out to be common man-friendly. However, there are people who are not common. They are not the middleclass. They are the rich and the super-rich people. They earn in a year what common man can dream of earning in decade or more. The Budget 2017 came down heavy on those rich and super-rich people, dispelling the myth that the Bharatiya Janata Party is a party of the rich – a party of the suited and the booted.

10% Surcharge on Super Rich

Prior to Budget 2017, there was already a surcharge on income tax for people earning more than INR 1 crore in a single year. They are the super-rich people. In Budget 2017, the rich people within the income slab of INR 50 lakhs to INR 1 crore also came under the radar of the government. For the first time in history, the rich people were given the burden of 10% surcharge on the income tax they pay on their yearly income.

So, the question is, “how will this 10% surcharge impact the rich?” We will try to find out the answer to this question in this article. But before we proceed, let us take a look at the tax-related highlights of the Union Budget of 2017.

Tax-related highlights of Union Budget 2017

  • Rich people (salaried) who fall within the income slab of INR 50 lakhs to INR 1 crore in a single year will have to pay 10% surcharge on the income tax that they pay on their taxable income in a year.
  • Super-rich people who fall within the income slab of INR 1 crore and above in a single year will have to pay 15% surcharge on the income tax that they pay on their taxable income in a year.
  • People who have yearly income within the range INR 2.50 lakhs and INR 3.50 lakhs will, under Section 87A, enjoy a rebate of INR 2,500.
  • People within the income range of INR 2.5 lakhs and INR 5 lakhs will now pay only 5% income tax instead of the previous level of 10%. This means that people within this range will all get a rebate of INR 12,500.

Arun Jaitley – the Union Finance Minister – announced during budget speech that taxes have been reduced to increase nation’s tax base and also to remove burden from the honest taxpayers. The new 10% surcharge will increase tax liability of rich people by INR 1.5 lakhs.

Now…

How will the surcharge of 10% affect the rich?

To understand this, we need to take a look at a numerical example. This will help us understand the entire scenario quickly and easily.

For the purpose of illustration, we are making these assumptions:

  • The taxpayer is an individual.
  • The taxpayer is less than 60 years old.
  • The taxpayer earns INR 60 lakhs in a single year. That is, he or she falls in the category RICH.

So, the surcharge of 10% will be applicable on payable income tax and then, there will 3% education cess on (income tax + surcharge).

For the sake of simplicity, we are considering that the person has not invested anywhere and has now housing loan to repay. So, in that case, the taxable income is INR 60 lakhs or INR 60,00,000.

The table below will now show head-on comparison of tax liability for the person in pre-budget and post-budget scenarios:

PLEASE NOTE THAT THE PERSON FALLS IN THE HIGHEST TAX SLAB OF 30% INCOME TAX BECAUSE THE YEARLY INCOME OF THE PERSON EXCEEDS INR 10 LAKHS IN A YEAR.
PARTICULARS PARTICULARS DENOTED BY LETTERS PRE-BUDGET POST-BUDGET
Taxable income   60,00,000 60,00,000
Income tax rate   30 % 30 %
Payable income tax A 18,00,000 18,00,000
Surcharge 10% on A B NIL 1,80,000
Education cess of 3% on A+B C 54,000 59,400
Total payable tax (A+B+C) D 18,54,000 20,39,400

So, the tax liability increases significantly after the new budget slabs and surcharge rates. However, there is one little problem in the above calculation.

Comes the Marginal Relief

We see that increment in income above the level of INR 50 lakhs is INR 10 lakhs. The question here is, “Did the tax increment take place proportionately because of the surcharge?” According to rule, “Increase in payable tax (including the surcharge amount) can under no circumstances, exceed the increase in income above INR 50 lakhs”.

So, we will have to calculate the applicable surcharge and then calculate the net payable tax.

There will be steps involved in this calculation. The steps are described below:

Step 1: Surcharge calculation

From the last column of the above table, we can see that surcharge (element B) stands at INR 1,80,000.

Step 2: Finding out if tax increment exceeds income increment or not

Income increment: INR 60 lakhs – INR 50 lakhs = INR 10 lakhs.

Tax increment: (Tax payable on INR 60 lakhs – Tax payable on INR 50 lakhs) = INR 18,00,000 – INR 15,00,000 = INR 3,00,000 or INR 3 lakhs.

So, increase in income is greater than the increase in tax liability.

Step 3: Finding out whether marginal relief should be applied or not

Increase tax without surcharge was INR 3 lakhs.

Surcharge as calculated in step 1 was INR 1,80,000.

So, increase in tax include surcharge is INR 4,80,000.

Still, the increase in tax (including full surcharge) is less than the increase in income above 50 lakhs, which is INR 10 lakhs.

Thus, marginal relief will not be applicable in this case.

Hence, the table above shows the perfect calculation, wherein the final income tax payable by the person after the new budget rules come into effect will be much higher that the income tax he or she would have paid prior to the budget.

A table showing approximate additional tax to be paid (after including all deductions possible)

Income (salary) Post Budget (extra surcharge to be paid – approximate value) Pre-Budget (extra surcharge to be paid – approximate value)
INR 50 lakhs INR 1.2 lakhs NIL
INR 60 lakhs INR 1.5 lakhs NIL
INR 70 lakhs INR 1.8 lakhs NIL
INR 80 lakhs INR 2.1 lakhs NIL
INR 90 lakhs INR 2.4 lakhs NIL
INR 1 crore INR 2.7 lakhs NIL

So, if you are rich, you are going to pay more tax now even if you manage to invest everywhere and end up claiming maximum possible deductions.

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