Surcharge
Surcharge is an additional levy imposed on income tax (not on income) payable by individuals with income exceeding specified thresholds — ranging from 10% (income ₹50 lakh–₹1 crore) to 25% (income above ₹5 crore under the New Tax Regime) — effectively increasing the tax burden for higher-income taxpayers.
Surcharge is a tax on tax — it is computed as a percentage of the income tax liability and added on top of it. It is distinct from cess (which applies to all taxpayers) and applies only when total income crosses prescribed thresholds. For individuals, the current surcharge slabs are: 10% for income between ₹50 lakh and ₹1 crore; 15% for ₹1 crore to ₹2 crore; 25% for ₹2 crore to ₹5 crore; and 25% (New Regime) or 37% (Old Regime) for above ₹5 crore.
Budget 2023 rationalised surcharge on LTCG and STCG from listed equity, equity mutual funds, and units of business trusts. The surcharge on such income is capped at 15% regardless of total income — even if the taxpayer's other income would attract a 25% or 37% surcharge. This cap was introduced to prevent the effective capital gains tax rate from becoming prohibitively high for wealthy investors and to align India's capital gains tax burden with international norms.
For taxpayers in the highest surcharge brackets, the effective tax rate on equity LTCG works out to: 12.5% base rate + 15% surcharge on that = 14.375%, plus 4% cess on the total, bringing it to approximately 14.95%. For STCG under Section 111A, the effective rate similarly works out to approximately 23.92%. Without the surcharge cap, these rates could have been significantly higher for super-rich taxpayers.
Surcharge on other income heads — business income, salary, house property income — does not have this cap and scales up with the applicable slab. This creates a situation where, for high-income taxpayers, equity capital gains effectively face a lower combined tax rate than ordinary income, which has been a deliberate policy choice to encourage equity market participation.
For NRI investors, surcharge applies differently based on the nature of income and the DTAA provisions applicable to their country of tax residence. NRIs with royalty, fee for technical services, or certain investment income may face different surcharge computations. Engaging a tax advisor familiar with cross-border taxation is advisable for NRIs with complex India-sourced income.