Marginal Relief Definition
Marginal relief, in simpler words, is an income-tax act that offers organizations and working individuals a form of relief, thereby reducing the burden of surcharge.
Most HR managers get confused or stuck between tax terminologies. One such term is marginal relief.
Marginal relief benefits both employees as well as companies.
Let’s dive in and understand everything about this vital concept.
Here, we will discover:
- Understanding Marginal Relief Meaning!
- Marginal Relief for Individuals
- Marginal Relief for Organizations
Understanding Marginal Relief Meaning!
As per the provisions of the Income Tax Act 1961, an additional surcharge is payable on income tax by a person whose income exceeds the specified income tax categories, i.e. 30% bracket of income tax.
An income surcharge is an additional amount paid by taxpayers.
The idea of charging an additional surcharge is to allow the wealthy to spend more money on the government as a tax than on the lower classes.
The surcharge rate usually varies from 2% to 37%.
Under the rules of the Income-tax Act, an individual or company is not liable to pay an additional surcharge by an individual or company. May be referred to as marginal relief.
Marginal Relief helps to reduce the burden of tax on several individuals and companies.
Marginal Relief for Individuals
Marginal relief for individuals is a fiscal policy implemented by authorities, on occasion, to counter the potentially adverse effects of abrupt increases in tax liability concomitant to an individual’s income level shifting to a new threshold. In many progressive tax systems, higher income levels are subject to tax rates that are higher in absolute terms. However, an individual’s tax burden may rise disproportionately if an income threshold applies to any of their income.
This is where marginal relief mechanisms come into play, within a tax structure. Essentially, the primary aim is to facilitate a smoother transition between tax brackets – so an individual is allowed a reduction or relief on the surplus income falling in the higher tax bracket.
In a nutshell, it ensures an individual does not suddenly find himself contending with an excessively sharp escalation in his overall tax liability upon crossing a certain income threshold.
Marginal relief is often introduced alongside broader tax reforms by governments around the world, as they look to maintain a progressive tax regime which also serves to support growth in the economy.
In essence, it aims to strike the delicate balance between driving revenue and incentivizing growth, as it mitigates the impact of sudden changes in tax rates, particularly those that are the result of wholesale reform.
Simply put, it ensures that individuals are not dissuaded from earning more by disproportionate increases in the amount of tax that they must pay, delivering functionality and equilibrium to a system that is best described as progressive.
Marginal Relief for Organizations
Marginal relief for companies is applicable to companies whose total income amounts to a certain range, which exceeds specified thresholds and typically is in excess of Rs.1 crore but does not exceed Rs.10 crore.
Essentially, the provision states that the income tax payable (plus surcharge) on total income at a rate of 30% (plus surcharge) exceeding Rs.1 crore cannot exceed the total income tax payable on a total income of Rs.1 crore by an amount that exceeds such total income by Rs.10 lakh.
Thus, for companies within this income range, there is a built-in safeguard mechanism which ensures that the incremental increase in tax burden in percentage terms is kept under control and promotes a more balanced taxation approach.
For instance, if a company’s total income exceeds Rs.1 crore, but does not exceed Rs.10 crore, the relief mechanism would kick in, capping the extra tax payable on the higher income.
The careful and precise employment of marginal relief attests to a level of granularity that characterises corporate taxation – an exercise that will not stunt growth by exposing expanding businesses to disproportionately high tax liabilities and will, therefore, operate to promote a fair and congenial fiscal landscape.
There you go!
We hope now you have a clear understanding of marginal relief and how it works for both working individuals as well as organizations.