Impact of Revised Surcharge Rates on Taxpayers

Surcharge in income tax is an additional charge that taxpayers, whose income exceeds a certain threshold, need to pay. For instance, under the new tax regime, as an individual taxpayer, you would pay tax at a 30% rate on all income above ₹15 Lakhs. 

However, if your income exceeds ₹50 Lakhs, you need to pay a surcharge of 10% on the amount of income tax that is payable, subject to the rules pertaining to marginal relief.

Making surcharge a component of income tax is a way of ensuring the wealthiest sections of the population contribute more towards nation-building.

Until the Union Budget 2023, under the old and new tax regimes, the rate of surcharge was 10% for incomes above ₹50 Lakhs and up to ₹1 Crore. The surcharge rate was 15% if the income exceeds ₹1 Crore and is up to ₹2 Crores. 

For incomes of more than ₹2 Crores and up to ₹5 Crores, the rate was 25%. Lastly, the surcharge rate was 37% for incomes above ₹5 Crore. 

Now, the Finance Minister has introduced a concession for the highest taxpayers. As per the Budget 2023 announcement, this applies to the following:

• Individuals

• Hindu Undivided Family (HUF)

• Artificial Judicial Person (AJP)

• Body of Individuals (BOI)

• Association of Persons (AOP, other than co-operative)

All of the above under the new regime will pay the same surcharge rate of 37%. The highest rate in this case will be 25% surcharge on income that exceeds ₹2 Crore. Effectively, this will bring down the maximum rate to 39% from about 42.7%. 

It is important to note that no change of surcharge rate applies to taxpayers who opt to file taxes under the old tax regime. Below are the new surcharge rates, applicable post the 2023 Budget.

In the Union Budget Speech on 1 February 2023, the Finance Minister acknowledged that the tax rate for the highest income taxpayers is among the dearest in the world. The highest tax rate in India stands at 42.74%. 

Now, with the reduction in surcharge for incomes above ₹5 Crore, the tax rate drops by around 4%. 

As an example, consider that you have an income of ₹7 Crores. This income attracts a tax of about ₹2.05 Crores. With a rate of 37%, the surcharge would amount to ₹75.85 Lakhs. However, with the reduced rate of 25%, the surcharge is ₹51.25 Lakh. This leads to savings of 35%. 

On the one hand, those in the high-income group now have a route to saving on their tax payments. This can be a boon for those experiencing massive business growth. It helps them channel most of their revenue away from the tax funnel and into their own operations.

On the other hand, the revised surcharge rate can be looked on as an incentive for the new tax regime. Look closely and you will see that the reduced surcharge rate for the highest taxpayers applies only to the new tax regime. 

Hand in hand with this benefit to the highest taxpayers is the announcement about a rebate for incomes up to ₹7 Lakhs. Under the new regime, you pay zero income tax if your income does not exceed ₹7 Lakhs. 

Thus, both ends of the spectrum, the aspiring class and the wealthiest, benefit. By adding 

slab-rate concessions for the middle class, the Finance Minister seems to be urging all to adopt the new tax regime wholeheartedly. 

In fact, the Budget is unambiguous about this when it says in the Annexure, “The new tax regime for Individual and HUF, introduced by the Finance Act 2020, is now proposed to be the default regime”.

Going forward, you need to carefully weigh the pros and cons of the old and new tax regimes. If the new regime offers you outright tax savings, go for it and enjoy its simplicity. 

However, if you are proficient at drawing out all you can from the old regime, wait and watch. The Government may, perhaps, offer more benefits in times to come.