What is impact of Surcharge redution from 37% to 25% for High Income HNIs?

Not only did the Budget 2023 offer relief to the common man (by revising the new tax slabs), but also gave something to cheer to high-net-worth individuals (HNIs). The highest surcharge rate has been reduced from 37% to 25% under the new tax regime. Let’s see how HNIs can save more tax from this.

A surcharge is a sort of extra tax, that is charged over and above the basic tax paid by those with higher incomes (above Rs 50 lakh annual income).

As per the current rules, the following surcharges are applicable to high earners –

• Taxable Income between Rs 50 lakh to Rs 1 Crore – 10% Surcharge on tax amount
• Taxable Income between Rs 1 crore to Rs 2 Crore – 15% Surcharge on tax amount
• Taxable Income between Rs 2 crore to Rs 5 Crore – 25% Surcharge on tax amount
• Taxable Income above Rs 5 crore – 37 % Surcharge on tax amount

Now the Budget 2023 has announced that the surcharge rate on this highest slab will be reduced from 37% to 25%. So basically, the new surcharge slabs would be as follows:

• Taxable Income between Rs 50 lakh to Rs 1 Crore – 10% Surcharge on tax amount
• Taxable Income between Rs 1 crore to Rs 2 Crore – 15% Surcharge on tax amount
• Taxable Income above Rs 2 crore – 25% Surcharge on tax amount

So what has happened is that the Budget 2023 has done away with the 37% surcharge entirely. All individuals with income above Rs 2 crore will have to pay a 25% surcharge on income tax.

Mind you, the change is only for the new tax regime. There has been no reduction in surcharge rates for the old tax regime. So if the total income is more than Rs 5 crore, then the rate of surcharge remains 37%

So if your taxable income was Rs 5 crore, then your income tax rate (above Rs 15 lakh income) would as per old surcharge rates would be 30% + 37% surcharge + 4% cess. This comes to about 42.77%.

Now with the surcharge reduced from 37% to 25%, the new tax rate applicable to you (above Rs 15 lakh income) would be 30% + 25% surcharge + 4% cess. That is, it comes to about 39%

Let’s take a few example to see how this works out now.

Suppose you are rich and earn Rs 5.5 crore per year.

Now Rs 50,000 standard deduction is available to everyone, both under the different new vs old tax systems.

So let’s see your tax liability under different tax regimes, i.e., new (till March 2023) and new (from April 2023).

Under New Tax System (with 37% surcharge rule)

• Gross Income – Rs 5.5 Cr
• Standard Deduction – Rs 50,000
• New Taxable Income – Rs 5,49,50,000
• Taxes (as per slab rates) = Rs 1,62,22,500
• Surcharge = Rs 60,02,325
• Cess at 4% = Rs 8,88,993
• Total Tax = 2,31,13,818

Under New Tax System (with 25% surcharge rule)

• Gross Income – Rs 5.5 Cr
• Standard Deduction – Rs 50,000
• New Taxable Income – Rs 5,49,50,000
• Taxes (as per slab rates) = Rs 1,61,85,000
• Surcharge = Rs 40,46,250
• Cess at 4% = Rs 8,09,250
• Total Tax = 2,10,40,500

As is clear from the above, the reduction in surcharge and due to which the overall tax rates (to 39%) on the total income for those earning above Rs 5 crore benefits them and can help them save a lot of tax.

The person earning Rs 5.5 crore in our example above will save Rs 21 lakh because of the change in slab rates and cut in highest surcharge to 25%.

And how does the same example far under the old tax regime?

Under Old Tax System (with 37% surcharge rule)

• Gross Income – Rs 5.5 Cr
• Standard Deduction – Rs 50,000
• New Taxable Income – Rs 5,49,50,000
• Taxes (as per slab rates) = Rs 1,62,97,500
• Surcharge = Rs 60,30,075
• Cess at 4% = Rs 8,93,103
• Total Tax = 2,32,20,678

The tax to be paid in old system is anyways a lot higher so we can say that the changes made to the new tax system and the reduction in surcharge is a indirect push by the government to make HNIs adopt the new tax regime.

The highest surcharge on personal income tax reduced from 37% to 25% in India. Now irrespective of the tax deductions taken, all taxpayers with annual income of Rs 5 crore or more, will benefit if they opt for the new tax regime.