Earning Just Over ₹50 Lakhs: How Taxes Outpace Income Growth

Surcharge on income-tax has always been a significant factor affecting the total tax liability of individuals earning beyond certain thresholds. For the Assessment Year 2025-26, an interesting pattern emerges for resident individuals whose taxable income is between ₹50 Lakhs and ₹ 1 Crore.

Let us understand in detail, highlighting how surcharge dramatically impacts the overall tax burden.

Illustration of Tax Liability at Different Income Levels under New Tax Regime:

The following table illustrates the income-tax, surcharge, health and education cess, and total tax liability for 3 different taxable income levels above ₹ 50,00,000/- for assessment year 2025-26, with an example under the new tax regime of a resident individual, who is not a senior citizen:

Illustration of Tax Liability at Different Income Levels under Old Tax Regime:

The following table illustrates the income-tax, surcharge, health and education cess, and total tax liability for 3 different taxable income levels above ₹ 50,00,000/- for assessment year 2025-26, with an example under the new tax regime of a resident individual , who is not a senior citizen:

Analysis of the Tax Increase:

1. Income Increase of ₹1,00,000 Beyond ₹50,00,000:

• Taxable income rises from ₹50,00,000 to ₹51,00,000.
• Total tax liability increases from ₹12,37,600 to ₹13,41,600 under the New Tax Regime ₹13,65,000 to ₹14,69,000.
• Increment in tax liability: ₹1,04,000.
• Percentage of tax liability over income increase: 104%.

2. Income Increase of ₹2,00,000 Beyond ₹50,00,000:

• Taxable income rises from ₹50,00,000 to ₹52,00,000.
• Total tax liability increases from ₹12,37,600 to ₹14,30,000 ( ₹1,92,000/-) under the New Tax Regime and from ₹13,65,000 to ₹15,70,140/- (₹2,05,000/- under the Old Tax Regime.
• Percentage of tax liability over income increase: 96% under New Tax Regime and 102.5% under the Old Tax Regime.

3. Income Increase of ₹3,00,000 Beyond ₹50,00,000:

• Taxable income rises from ₹50,00,000 to ₹53,00,000.
• Total tax liability increases from ₹12,37,600 to ₹14,64,320 ( ₹2,26,720/-) under the New Tax Regime ₹13,65,000 to ₹16,04,460 (₹2,39,460/-).
• Percentage of tax liability over income increase: 75.6% under New Tax Regime and 79.9% under the Old Tax Regime.

Why Does This Happen?

The surcharge is a percentage of income-tax that kicks in once taxable income exceeds certain thresholds. For resident individuals:

• No surcharge applies up to ₹50,00,000.
• A 10% surcharge applies to income between ₹50,00,001 and ₹1,00,00,000.
• Higher income levels attract progressively higher surcharge rates.

While income-tax increases linearly with income, the surcharge adds an exponential effect once the threshold is crossed. This leads to scenarios where the tax liability increases more than proportionally compared to the increase in income.

Key Takeaways:

1. Threshold Effect: Crossing the ₹50,00,000 threshold significantly impacts tax liability due to the surcharge. Taxpayers should be aware of this effect when planning finances.
2. Marginal Impact: The marginal increase in total tax liability is disproportionately higher than the income increment, especially as the surcharge rate escalates.
3. Tax Planning: Individuals with taxable income slightly exceeding ₹50,00,000 might consider legitimate tax-saving strategies.

Conclusion:

The surcharge, while intended to ensure higher contributions from high-income earners, creates a steep rise in tax liability for those crossing the threshold of ₹50,00,000. Taxpayers must be mindful of this and plan accordingly to mitigate the impact of this interesting, yet significant, aspect of taxation.

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Disclaimer:

This article is based on my personal understanding of relevant provisions of the Income-tax Act and judicial precedents and should not be construed as legal advice. Taxpayers should seek professional advice for specific matters.

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