Income Tax Surcharge & Marginal Relief
FY 2025-26 (AY 2026-27) Explained

Income tax becomes more important to understand when total income crosses ₹50 lakh because surcharge may apply in addition to normal income tax. Marginal relief is designed to prevent a disproportionate increase in tax when income crosses a surcharge threshold. This guide explains income tax surcharge and marginal relief for FY 2025-26 (AY 2026-27), including rates, calculation methods, examples, old versus new tax regime treatment, special-rate income and common mistakes.

For a broader understanding of Indian income tax, you can also visit our Complete Guide to Income Tax in India, which covers tax slabs, regimes, deductions, rebate, ITR filing and other important topics.

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Quick Answer

Income tax surcharge is an additional charge on income tax when an individual's total income exceeds specified thresholds. For FY 2025-26, surcharge for most ordinary income is 10% above ₹50 lakh, 15% above ₹1 crore, 25% above ₹2 crore and, depending on the regime, 37% above ₹5 crore under the old regime or 25% under the new regime. Marginal relief may reduce the surcharge when crossing these limits.

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Summary

For FY 2025-26, income tax surcharge does not apply simply because your salary or gross receipts exceed ₹50 lakh. The relevant calculation is based on total income and the applicable tax rules. Once the prescribed threshold is crossed, surcharge is calculated on the income-tax amount, not directly on the entire income.

Marginal relief is an important protection for taxpayers whose income is only slightly above a surcharge threshold. It ensures that the additional tax burden does not become excessive merely because income has crossed ₹50 lakh, ₹1 crore, ₹2 crore or ₹5 crore. The precise marginal-relief calculation depends on the applicable threshold, tax regime and type of income.

The Income Tax Department states that for AY 2026-27, surcharge on ordinary income is 10% between ₹50 lakh and ₹1 crore, 15% between ₹1 crore and ₹2 crore, 25% between ₹2 crore and ₹5 crore, and 37% above ₹5 crore under the old regime. Under the new regime, the surcharge on ordinary income is capped at 25% even above ₹5 crore.

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What is Income Tax Surcharge?

Income tax surcharge is an additional amount charged on the income-tax liability of taxpayers whose total income exceeds specified limits. It is not a separate tax slab applied directly to the entire income. Instead, the applicable surcharge percentage is generally calculated on the income-tax amount.

For example, if a taxpayer has an income-tax liability of ₹10 lakh and a 10% surcharge applies, the surcharge before considering marginal relief is ₹1 lakh. The income tax plus surcharge would therefore be ₹11 lakh before adding the applicable Health and Education Cess.

This distinction is important because many taxpayers incorrectly calculate surcharge as a percentage of their total income. That is generally not the correct method.

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Who Has to Pay Income Tax Surcharge?

Income tax surcharge may apply when an assessee's total income exceeds ₹50 lakh. The applicable surcharge rate depends on the income range and the nature of income. For individuals, the rates also differ at the highest income level depending on whether the old or new tax regime is used.

The Income Tax Department's AY 2026-27 guidance confirms that surcharge applies when total income exceeds the specified limits and that marginal relief is available around the relevant thresholds.

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Income Tax Surcharge Rates FY 2025-26

For FY 2025-26, corresponding to AY 2026-27, the surcharge structure for individuals can be broadly understood through the following table. The table relates primarily to ordinary income; specified capital gains and certain other categories can have different surcharge treatment.

The Income Tax Department confirms these surcharge rates for AY 2026-27. Under the new tax regime, the surcharge on ordinary income is capped at 25% above ₹5 crore, while the old regime can have a 37% surcharge at that level.

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Is Surcharge Calculated on Total Income?

No. Surcharge is generally calculated as a percentage of the income-tax liability. The income level determines which surcharge rate applies, but the surcharge itself is imposed on the amount of income tax, subject to the special rules applicable to different categories of income.

For example, if total income places a taxpayer in the 15% surcharge range and the calculated income tax is ₹20 lakh, the surcharge before marginal relief would be ₹3 lakh. The combined amount of income tax and surcharge would therefore be ₹23 lakh before Health and Education Cess.

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Why is Marginal Relief Needed?

Marginal relief is intended to prevent a taxpayer from facing an excessive increase in tax merely because total income has crossed a surcharge threshold by a small amount. Without marginal relief, a small increase in income near a threshold could result in a relatively large increase in surcharge.

For example, imagine two taxpayers whose incomes are close to ₹50 lakh. If one taxpayer earns slightly below the threshold and another earns slightly above it, the second taxpayer may enter the surcharge zone. Marginal relief can reduce the additional surcharge so that the tax and surcharge burden remains within the prescribed limit.

What is Marginal Relief on Income Tax Surcharge?

Marginal relief on surcharge is a tax relief available when total income crosses a specified surcharge threshold. The relief generally ensures that the amount payable as income tax plus surcharge does not exceed the tax payable at the relevant threshold by more than the amount of income exceeding that threshold. The Income Tax Department specifically provides this mechanism for AY 2026-27.

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Marginal Relief Limits FY 2025-26

For AY 2026-27, marginal relief is relevant around ₹50 lakh, ₹1 crore, ₹2 crore and ₹5 crore under the old regime. Under the new regime, the Income Tax Department's individual guidance specifies marginal relief around ₹50 lakh, ₹1 crore and ₹2 crore; the new-regime surcharge on ordinary income is capped at 25% above ₹5 crore.

The statutory marginal-relief mechanism compares the tax and surcharge on the taxpayer's actual income with the tax payable at the relevant threshold plus the amount by which income exceeds that threshold.

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How Does Income Tax Surcharge Work?

Income tax surcharge works after the basic income-tax liability has been calculated. The taxpayer's total income determines whether surcharge applies and which surcharge rate is relevant. The surcharge is then calculated on the applicable income-tax amount, subject to marginal relief and special provisions for particular types of income.

1. Calculate total income according to the applicable income-tax rules.
2. Calculate basic income tax under the applicable tax regime and provisions.
3. Check whether total income exceeds a surcharge threshold.
4. Apply the appropriate surcharge percentage to the relevant income-tax amount.
5. Check whether marginal relief is available.
6. Calculate Health and Education Cess at 4% on income tax plus applicable surcharge.
7. Consider tax deducted at source, advance tax and other eligible credits to determine the final amount payable or refundable.

Income Tax Surcharge Calculation Formula

The basic calculation can be represented as follows:

Surcharge = Applicable Income Tax × Surcharge Rate

However, this is only the starting point. If marginal relief is available, the surcharge amount may need to be reduced.

Tax after surcharge relief = Income Tax + allowable surcharge after marginal relief

After this, Health and Education Cess is generally calculated at 4% of income tax plus surcharge. The Income Tax Department confirms the 4% cess rate for AY 2026-27.

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Example of Income Tax Surcharge Above ₹50 Lakh

Suppose an individual's total income is ₹50.10 lakh and the taxpayer is subject to the old tax regime. Assume, purely for illustration, that the normal income-tax calculation results in tax of ₹13,15,500 before surcharge.

• 🟢 Total income = ₹50,10,000
• 🟢 Tax before surcharge = ₹13,15,500
• 🟢 Surcharge rate = 10%
• 🟢 Surcharge before marginal relief = ₹1,31,550
• 🟢 Excess income over ₹50 lakh = ₹10,000

Without marginal relief, income tax plus surcharge would be ₹14,47,050 before cess. But marginal relief compares this amount with the tax payable at ₹50 lakh plus the ₹10,000 excess income. Therefore, the surcharge may be substantially reduced because the taxpayer has crossed the threshold only slightly.

This example demonstrates why simply multiplying the income-tax amount by the surcharge rate is not always sufficient. Marginal relief must be checked whenever income is close to a surcharge threshold.

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Example of Marginal Relief at ₹1 Crore

Consider a taxpayer with total income of ₹1.01 crore under the old regime. Since the income is above ₹1 crore but does not exceed ₹2 crore, the applicable ordinary-income surcharge rate is 15% before considering marginal relief.

• 🟢 Total income = ₹1.01 crore
• 🟢 Relevant threshold = ₹1 crore
• 🟢 Excess income = ₹1 lakh
• 🟢 Surcharge rate = 15%
• 🟢 Marginal relief should be checked before finalising the surcharge

The calculation compares the income tax plus surcharge on ₹1.01 crore with the income tax payable on ₹1 crore plus the ₹1 lakh excess income. If the first amount exceeds the permitted limit, marginal relief reduces the surcharge accordingly.

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Example of Marginal Relief at ₹2 Crore

Suppose total income is ₹2.01 crore and the taxpayer is under the old tax regime. The taxpayer has crossed the ₹2 crore threshold by ₹1 lakh. The applicable surcharge band for ordinary income is 25%, but marginal relief needs to be considered.

• 🟢 Total income = ₹2.01 crore
• 🟢 Relevant threshold = ₹2 crore
• 🟢 Excess income = ₹1 lakh
• 🟢 Ordinary-income surcharge rate = 25%
• 🟢 Marginal relief = difference between the surcharge-inclusive liability and the permitted threshold-based liability, subject to the applicable rules

This is one of the situations where taxpayers can mistakenly assume that the entire 25% surcharge must automatically be paid. The actual liability should be checked after applying the marginal-relief provisions.

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Example of Marginal Relief at ₹5 Crore

Under the old tax regime, ordinary income above ₹5 crore can attract a 37% surcharge. Therefore, crossing ₹5 crore by a small amount can create a significant surcharge calculation. The marginal-relief provision around ₹5 crore is intended to prevent an excessive increase caused solely by crossing the threshold.

Under the new tax regime, however, the surcharge on ordinary income is capped at 25% above ₹5 crore. This makes the treatment different from the old regime at the highest income level.

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Old Tax Regime vs New Tax Regime Surcharge

The surcharge rates are similar across the old and new regimes up to ₹5 crore for ordinary income. The major difference occurs above ₹5 crore, where the old regime can apply a 37% surcharge while the new regime caps the surcharge at 25%.

The surcharge comparison should not be used alone to decide which tax regime is better. The complete calculation also depends on tax slabs, deductions, exemptions, rebate eligibility and the nature of income. You can compare the broader regime rules in our Old vs New Tax Regime guide.

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Does Marginal Relief Apply in Both Tax Regimes?

Yes, marginal-relief provisions apply under both tax regimes, but the relevant thresholds and highest surcharge treatment differ. For individuals under AY 2026-27, the Income Tax Department specifies marginal relief around ₹50 lakh, ₹1 crore and ₹2 crore under the new regime, while the old regime also has marginal relief around ₹5 crore.

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Surcharge on Capital Gains

Capital gains require special attention because the surcharge treatment can differ from ordinary income. The Income Tax Department states that the enhanced 25% and 37% surcharge rates are not levied on income chargeable under specified provisions including Sections 111A, 112, 112A and 115AD. Consequently, the maximum surcharge on tax payable on such specified income is generally 15%.

This means a taxpayer should not automatically apply the ordinary-income surcharge rate to every component of total income. The nature of income and the section under which it is taxed can affect the surcharge calculation.

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Surcharge on Dividend Income

Certain dividend income can also have special surcharge treatment. The Income Tax Department's individual tax guidance lists dividend income among the categories where the maximum surcharge is generally 15%, subject to the applicable provisions and exclusions.

Therefore, taxpayers with substantial dividend income should separate ordinary income and special-rate income when performing a surcharge calculation rather than applying one percentage mechanically to the entire tax liability.

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Surcharge on Income Tax vs Surcharge on Income

The words "income tax surcharge" can sometimes cause confusion. Surcharge is not normally calculated by taking 10%, 15%, 25% or 37% of total income. Instead, the surcharge percentage is generally applied to the relevant income-tax amount.

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How to Calculate Marginal Relief Step by Step

The following process is useful for a basic understanding of marginal relief. Actual tax computation can be more complex where special-rate income, deductions, losses, rebates or other provisions are involved.

1. 🟢 Determine the taxpayer's total income.
2. 🟢 Identify the surcharge threshold crossed by the taxpayer.
3. 🟢 Calculate income tax on the actual total income.
4. 🟢 Calculate the surcharge applicable before marginal relief.
5. 🟢 Calculate the income-tax liability at the relevant threshold.
6. 🟢 Determine the amount by which actual income exceeds the threshold.
7. 🟢 Compare the actual income-tax plus surcharge liability with the permitted amount under marginal relief.
8. 🟢 Reduce surcharge by the eligible marginal relief, if applicable.
9. 🟢 Add 4% Health and Education Cess on the applicable income tax plus surcharge.

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Marginal Relief Formula

A simplified conceptual representation of the marginal-relief calculation is:

Maximum permitted tax + surcharge = Tax at threshold + Income exceeding the threshold

Therefore, a simplified way to think about the relief is:

Marginal Relief = Actual tax + surcharge − Maximum permitted tax + surcharge

Where the calculated result is positive and the taxpayer satisfies the applicable conditions, the excess can represent the relief required to bring the liability within the prescribed limit.

The exact statutory computation should be followed for the taxpayer's circumstances rather than relying solely on this simplified presentation.

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Income Tax Surcharge and Health and Education Cess

After calculating income tax and applicable surcharge, Health and Education Cess is generally charged at 4% on the amount of income tax plus surcharge. This means cess is an additional component after the surcharge calculation.

For example, if income tax after applicable surcharge is ₹10 lakh, a 4% cess would be ₹40,000, making the amount ₹10.40 lakh before considering other credits or adjustments.

The Income Tax Department confirms the 4% Health and Education Cess rate for AY 2026-27.

Does Surcharge Increase the Tax Rate on the Entire Income?

Surcharge does not mean that the entire income suddenly becomes taxable at 10%, 15%, 25% or 37%. These percentages refer to surcharge on the applicable income-tax amount. The underlying income-tax calculation continues to follow the relevant tax slabs and special-rate provisions.

This is particularly important when explaining why a person with income slightly above ₹50 lakh does not simply pay an additional 10% of ₹50 lakh as surcharge.

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Surcharge Calculation for Salaried Individuals

A salaried individual can become liable for surcharge if total income after the applicable deductions and adjustments exceeds the relevant threshold. Gross salary by itself should not automatically be treated as the amount on which surcharge is calculated.

A taxpayer should first determine total income under the selected tax regime and applicable provisions. The resulting income-tax liability is then used to determine surcharge, subject to special rules and marginal relief.

For a broader explanation of salary-related tax calculations, see our Income Tax Calculator FY 2025-26 guide.

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Surcharge for Individuals with Business or Professional Income

Individuals earning business or professional income can also be subject to surcharge when total income crosses the prescribed thresholds. The calculation can become more complicated when income consists of multiple categories, special-rate income, deductions, losses or other adjustments.

The tax regime selection can also affect the highest surcharge rate. The Income Tax Department's AY 2026-27 guidance for individuals with business or professional income confirms 25% as the new-regime surcharge rate above ₹5 crore and 37% under the old regime for ordinary income.

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Surcharge When Income is Just Above ₹50 Lakh

This is one of the most searched practical situations. If total income is only slightly above ₹50 lakh, the taxpayer enters the 10% surcharge range for applicable ordinary income. However, marginal relief may significantly reduce the surcharge.

Therefore, taxpayers should not conclude that the entire 10% surcharge will necessarily remain payable merely because income is ₹50 lakh plus a small amount. A proper marginal-relief calculation is required.

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Surcharge When Income is Just Above ₹1 Crore

When total income crosses ₹1 crore, the ordinary-income surcharge rate moves from 10% to 15%. Marginal relief can become important where the excess over ₹1 crore is relatively small.

The relief mechanism compares the tax and surcharge at actual income with the tax at ₹1 crore plus the amount by which actual income exceeds ₹1 crore.

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Surcharge When Income is Just Above ₹2 Crore

When total income exceeds ₹2 crore, the ordinary-income surcharge rate becomes 25%. Marginal relief can apply where the taxpayer has only recently crossed the ₹2 crore threshold.

This is especially important for taxpayers whose income changes from year to year because of bonuses, business profits, property transactions, investment gains or other irregular income.

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Surcharge When Income Exceeds ₹5 Crore

The treatment above ₹5 crore differs between the old and new tax regimes. Under the old regime, ordinary income above ₹5 crore can attract a 37% surcharge. Under the new regime, the surcharge on ordinary income is capped at 25%.

The Income Tax Department confirms that the enhanced 37% surcharge is not levied on specified income covered by provisions such as Sections 111A, 112, 112A and 115AD, for which the maximum surcharge is generally 15%.

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Common Mistakes in Income Tax Surcharge Calculation

Mistake 1: Applying surcharge directly to total income

A common error is to calculate 10%, 15%, 25% or 37% of total income. Surcharge is generally calculated on the applicable income-tax amount, not directly on total income.

Mistake 2: Ignoring marginal relief

Taxpayers whose income is just above a surcharge threshold should always check marginal relief. Ignoring it can result in an overstated tax calculation.

Mistake 3: Applying the old-regime 37% rate to new-regime income above ₹5 crore

For ordinary income above ₹5 crore, the new regime has a 25% surcharge cap, whereas the old regime can have a 37% surcharge. The two regimes should not be treated identically at this income level.

Mistake 4: Applying the highest surcharge rate to special-rate income

Specified capital gains and certain dividend income can have a maximum surcharge of 15%. Applying 37% automatically to every component of income can produce an incorrect calculation.

Mistake 5: Forgetting Health and Education Cess

The calculation is not complete after income tax and surcharge. Generally, 4% Health and Education Cess is added to income tax plus surcharge.

Mistake 6: Confusing FY and AY

FY 2025-26 refers to the financial year from 1 April 2025 to 31 March 2026. The corresponding assessment year is AY 2026-27. Keeping these terms separate helps avoid using the wrong tax-year information.

Mistake 7: Using an old surcharge table

Tax rules can change through Finance Acts and subsequent amendments. Always verify the applicable assessment year before relying on an old surcharge table.

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Income Tax Surcharge Checklist

• 🟢 Confirm the financial year and assessment year.
• 🟢 Calculate total income correctly.
• 🟢 Identify the applicable tax regime.
• 🟢 Separate ordinary income from income taxed at special rates.
• 🟢 Calculate basic income tax.
• 🟢 Check whether total income exceeds ₹50 lakh.
• 🟢 Identify the correct surcharge band.
• 🟢 Calculate surcharge on the relevant income-tax amount.
• 🟢 Check marginal relief if the threshold has been crossed.
• 🟢 Add 4% Health and Education Cess where applicable.
• 🟢 Adjust TDS, advance tax and other eligible tax credits.
• 🟢 Verify the final calculation against the applicable Income Tax Department rules.

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How Income Tax Surcharge Affects High-Income Taxpayers

Surcharge can materially increase the tax liability of high-income taxpayers because it is calculated on income tax. The effect becomes more noticeable as income moves into higher surcharge bands.

For this reason, taxpayers with income near ₹50 lakh, ₹1 crore, ₹2 crore or ₹5 crore should perform a detailed calculation rather than relying only on the headline surcharge percentage.

The impact can also differ significantly depending on whether the taxpayer chooses the old or new regime, particularly when ordinary income exceeds ₹5 crore.

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Relationship Between Income Tax Slabs and Surcharge

Income tax slabs and surcharge are two different parts of the tax calculation. Tax slabs determine the basic income-tax liability based on the applicable regime and type of taxpayer. Surcharge is an additional charge that can apply once total income crosses specified thresholds.

For the complete slab structure for FY 2025-26, see our Income Tax Slab FY 2025-26 guide.

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Is Marginal Relief the Same as Section 87A Rebate?

No. Marginal relief on surcharge and the Section 87A rebate are different provisions serving different purposes. Marginal relief addresses the effect of crossing specified surcharge thresholds, while Section 87A provides a rebate to eligible resident individuals subject to the applicable conditions.

For a separate explanation of the Section 87A rules, see our Rebate under Section 87A guide.

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Can Marginal Relief Completely Remove Surcharge?

Marginal relief can substantially reduce surcharge when income is only slightly above a threshold. Depending on the calculation, it can reduce the surcharge to a very small amount or potentially eliminate the surcharge attributable to the threshold effect. The exact result must be calculated using the applicable tax provisions.

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Does Every Person Above ₹50 Lakh Pay the Same Surcharge?

No. The surcharge depends on the total income range, the nature of income and the applicable tax regime. Special-rate income can have different surcharge treatment, and marginal relief may reduce surcharge near the relevant thresholds.

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Does Surcharge Apply to Tax or Income?

Surcharge is generally imposed on the amount of income tax rather than directly on total income. Total income is used to identify whether the surcharge threshold has been crossed and which surcharge rate applies.

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How to Estimate Your Income Tax Including Surcharge

A practical calculation should start with total income, deductions and applicable tax rates. After calculating basic tax, determine whether surcharge applies and whether marginal relief is available. Finally, add Health and Education Cess and adjust eligible tax credits.

You can use our Income Tax Calculator FY 2025-26 guide as a starting point for understanding the broader tax calculation.

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Income Tax Surcharge: Quick Comparison Table

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📌 Similar guides: Section 80C Deductions List, Standard Deduction FY 2025-26, HRA Exemption Calculation, Which ITR Form Should You File?

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Official Income Tax Resources

For current tax rates, surcharge provisions and marginal-relief rules, taxpayers should verify the information with the official Income Tax Department because tax provisions can change through amendments and Finance Acts.

• 🔗 Income Tax Department e-Filing Portal - Use the official portal for income-tax services, return filing and taxpayer information.
• 🔗 Income Tax Department - Refer to official tax-rate information, provisions and taxpayer guidance.

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Conclusion

Income tax surcharge is an additional charge that can apply when total income exceeds specified thresholds. For FY 2025-26, ordinary-income surcharge for individuals generally starts at 10% above ₹50 lakh, rises to 15% above ₹1 crore and 25% above ₹2 crore. Above ₹5 crore, the old regime can have a 37% surcharge, while the new regime caps the ordinary-income surcharge at 25%.

Marginal relief is equally important because it protects taxpayers who cross a surcharge threshold by a relatively small amount. Instead of assuming that the full surcharge rate applies automatically, taxpayers should compare the actual tax and surcharge with the prescribed threshold-based limit.

Special-rate income such as specified capital gains can have different surcharge treatment, and Health and Education Cess generally applies at 4% to income tax plus surcharge. Therefore, a proper income tax surcharge calculation should consider the tax regime, total income, type of income, surcharge band, marginal relief and cess together.

For a broader understanding of tax slabs, deductions, regimes, rebate and return filing, visit our Complete Guide to Income Tax in India.

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Suggested Post

• Complete Guide to Income Tax in India (FY 2025-26 / AY 2026-27)
• Income Tax Slab FY 2025-26 (AY 2026-27) - New vs Old Regime Rates
• Old vs New Tax Regime - Which One is Better for FY 2025-26?
• Income Tax Calculator FY 2025-26 - Calculate Your Tax Online
• Rebate under Section 87A FY 2025-26 (AY 2026-27) - Income Tax Rebate Rules

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Frequently Asked Questions (FAQs)

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