Understanding Marginal Relief in case of Companies

Before moving on to the concept of marginal relief in the case of companies, we should first get an understanding of the income tax rates and rates of surcharge. This will certainly help us to understand “Marginal Relief” in a better manner.

Income Tax Rates applicable in case of companies (A.Y. 2023-24)

The Income Tax Act, 1961 prescribes different tax rates and surcharge rates for foreign companies and domestic companies. Domestic companies are liable to pay tax from 15% to 30% whereas foreign companies are liable to pay tax at a flat rate of 40%. In addition to income tax, the companies are liable also liable to pay surcharge and cess. Read below for the income tax rates:

Income Tax rate of Foreign Companies

Tax Rate

Surcharge

Cess

40%

If total income exceeds Rs. 1 crore but not exceeds Rs. 10 crore: 2%
If the total income exceeds Rs. 10 crores: 5%

4% on income tax plus surcharge

Marginal Relief:

Yes, marginal relief is available to foreign companies on the additional income tax payable (Income Tax & Surcharge) owing to surcharge applicability.

Note:

W.e.f. A.Y. 2023-24, Section 115BBD has been withdrawn which provided for a special tax rate of 15% in case of Indian Companies whose total income included any income by way of dividends by a foreign company where such Indian Company held 26% or more in nominal value of the equity share capital of the such foreign company.

Income Tax Rates for Domestic Companies

Condition	Tax Rate Applicable
If the Company does not exercise the option to be taxed as per Section 115BAA or 115BAB: If the total turnover or gross receipts of the P.Y. 2019-20 does not exceed Rs. 400 Crore In other Cases	25%
	30%
If the Company opts to be taxed under the new tax regime under section 115BAA subject to conditions mentioned in section 115BAA (2)	22%
If the Company is a new manufacturing company and it opts to be taxed under section 115BAB subject to conditions mentioned in section 115BAB (2)	15%
Rates of Surcharge: In case domestic company does not opt for new tax regime: Nil Surcharge up to total income of Rs. 1 crore 7% Surcharge if the total income is above Rs. 1 crore but up to Rs. 10 crore 12% Surcharge if the total income exceeds Rs. 10 crores If the domestic company exercises option for new tax regime u/s 115BAA or 115BAB: Surcharge 10% (without looking into any total income threshold)
Cess: 4% on the income tax plus surcharge

Marginal Relief in case of Domestic Companies

If the company continues to pay tax under the old tax regime	If the company opts for new tax regime u/s 115BAA	If the company opts for new tax regime u/s 115BAB
Yes, Marginal Relief is available in respect of additional tax payable owing to the applicability of surcharge	Not Applicable	Not Applicable

Now, since we have got understanding of the rates of tax and surcharge, we would now understand the concept of “Marginal Relief” in the case of the companies.

Marginal Relief in case of companies

The concept of marginal relief is designed to provide relaxation from the levy of surcharge to a taxpayer (company) where the total income of the company exceeds marginally above Rs. 1 crore or Rs. 10 crores.
It is to be noted that marginal relief is available to every company whether it is a domestic company or a foreign company.
However, if the domestic company has opted for new tax regime under section 115BAA or 115BAB, the concept of marginal relief is immaterial for such a company as the rate of tax and surcharge is the same irrespective of the total income of the company.
Marginal relief shall be provided to companies in such a manner that the total amount payable as income tax and surcharge on total income exceeding Rs. 1 crore but not exceeding Rs. 10 crore shall not exceed the income tax payable on Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore.
Similarly, the total amount payable as income tax and surcharge on total income of more than Rs. 10 crores shall not exceed the income tax payable on Rs. 10 crores by more than the amount of income that exceeds Rs. 10 crores.

Let’s take an example to understand the concept of marginal relief.

Suppose X Limited has a total income of Rs. 1 crore in A.Y. 2023-24 and the applicable tax rate is 30% (old tax regime). In this case, Income tax payable is 30% of Rs. 1 crore = Rs. 30 Lakhs. Surcharge: Nil. Thus, the Income tax and surcharge payable is Rs. 30 Lakhs.

Now suppose X Limited has earned Rs. 1.01 crores in A.Y. 2023-24. In this case, income tax payable is 30% of Rs. 1.01 crores = Rs. 30,30,000. But since the total income is more than Rs. 1 crore, surcharge will be applicable @ 7% on Rs. 30,30,000= Rs. 2,12,100. Thus, the total income tax and surcharge payable is Rs. 30,30,000 + 2,12,100 = Rs. 32,42,100.

We can have a comparison of the tax payable in both circumstances:

X Limited having total income Rs. 1 crore

X Limited having total income Rs. 1.01 crore

Income Tax & Surcharge Payable: Rs. 30,00,000

Income Tax & Surcharge Payable: Rs. 32,42,100

We can see that just because the total income has increased merely by Rs. 1 lakh, the income tax & surcharge payable has increased by Rs. 2,42,100 (32,42,100 – 30,00,000).

Here comes the concept of marginal relief. As per this concept, the company is not liable to pay income tax and surcharge in excess of additional income above Rs. 1 crore. It means that the company will have to pay a tax of Rs. 30 Lakhs + 1 Lakh = Rs. 31 Lakh and will get a marginal relief of Rs. 1,42,100 in the tax amount.

About Author: The author is CA Naveen Goyal who is a qualified Chartered Accountant and having experience of more than 16 years in direct & indirect taxes. For any queries contact: admin@taxwink.com

Disclaimer: The above article is meant purely for educational purposes and does not carry any persuasive value. Therefore, readers are advised to act diligently and under consultation with any professional before applying the information contained in this article.

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