Why Earning Just Above Rs 50L Can Be A Net Loss: Dissecting The Hidden Slab Penalties

In India, the tax structure can turn the act of earning more into a net financial loss. One such scenario occurs when an individual's income crosses the Rs 50 lakh threshold. Although this marks the start of a higher tax bracket, the transition comes with hidden slab penalties that many overlook.

In India's progressive tax system, income beyond Rs 50 lakh is taxed at 30%. While this may seem like a standard increase, it's not just the higher tax rate that penalises higher earners. Various surcharges, cess, and hidden deductions kick in, leading to a situation where earning marginally above Rs 50 lakh may reduce disposable income more significantly than expected.

Real-Life Based Example

Suppose: Radhika, a 38-year-old independent strategy consultant based in Bengaluru, had a great financial year. Her regular consulting projects brought in Rs 49.5 lakh (taxable income after deductions). She's conservative with her money and carefully plans her taxes using the old tax regime. Then came an opportunity - a new client offered her a short-term project paying Rs 1.5 lakh. Excited to cross the Rs 50 lakh mark for the first time, she accepted.

But here's what happened to her income and taxes as per CA Dr Suresh Surana.

Taxation under the Income Tax Act in India, itself is progressive, i.e., as the income rises, a larger percentage of tax is levied for the growing additional income earned beyond each limit of slab. However, for all individuals whose taxable income exceeds Rs 50 lakh, there is a surcharge which can sometimes result in a disproportionate increase in the tax payable. This aspect has been considered and Marginal Relief has been provided so as to provide some relief in cases where surcharge increase in tax payable exceeds increase in income.

Marginal Relief applies when the total tax (including the surcharge) on income slightly above a specific threshold (such as Rs 50 lakh) results in a tax liability increase that exceeds the additional income earned. In simple terms, Marginal Relief ensures that the additional tax liability due to the surcharge does not exceed the additional income earned above the threshold. This relief is granted to the taxpayer so that the resulting tax payable will be in line with increased income received.

"It can be better understood by taking an example: Mr. A earns Rs 50 lakh annually. However, if his income increases to Rs 50.5 lakh, he crosses the Rs 50 lakh threshold, which triggers a surcharge under the Income Tax Act. This results in a significant rise in his tax liability, even though the additional income is only Rs 50,000. The tax impact of this small increase in income is analyzed under the New Tax Regime," stated CA Dr Suresh Surana.

Computation:

To illustrate the impact of a small increase in income above the Rs 50 lakh threshold, consider Mr. A's situation. If his income rises from Rs 50 lakh to Rs 50.5 lakh, the additional Rs 50,000 results in a significant increase in his tax liability due to the surcharge on incomes above Rs 50 lakh. This computation examines how the tax amount changes for Mr. A under both scenarios and demonstrates the effect of the Marginal Relief provision, which helps alleviate the surcharge burden to some extent. The table below shows the detailed tax calculation after applying the marginal relief:

To illustrate the impact of a small increase in income above the Rs 50 lakh threshold, we consider Radhika's situation as per the given example. If her income rises from Rs 49.5 lakh to Rs 51 lakh, the additional Rs 1,50,000 results in a significant increase in her tax liability due to the surcharge on incomes above Rs 50 lakh. The table below shows the detailed tax calculation before and after applying the marginal relief:

In the given example, Radhika's consulting income of Rs. 49.5 lakh (post deductions) originally placed her comfortably below the Rs. 50 lakh surcharge threshold under the Old Tax Regime for FY 2025-26. At this level, her basic tax liability stood at Rs. 12.97 lakh, with no surcharge applicable. However, after accepting an additional project worth Rs. 1.5 lakh raising her total income to Rs. 51 lakh, her tax picture changed drastically.

Under the revised income level, her basic tax increased to Rs. 13.42 lakh, and she became liable for a 10% surcharge amounting to Rs. 1.34 lakh, bringing her total tax (excluding cess) to Rs. 14.76 lakh. Owing to the marginal relief, her tax burden was limited to the amount payable on Rs. 50 lakh plus the incremental income over that threshold. This restricted her tax to Rs. 14.12 lakh, effectively reducing her tax burden by Rs. 64,250. After adding 4% education cess of Rs. 56,500, her final tax tax liability is Rs. 14.69 lakh.

Marginal Tax Rate Woes: When Extra Income Doesn't Add Up

As per Dr. Swapnil Sahoo, Area of Expertise- Strategy Great Lakes Institute of Management, Gurgaon, "for instance, the income beyond Rs 50 lakh attracts an additional 10% surcharge, and the income beyond Rs 1 crore is taxed at a higher rate, further escalating the tax burden. Additionally, middle-class benefits such as exemptions on tax-saving investments or deductions may be limited or eliminated as income rises, increasing the effective tax rate."

Moreover, high earners often face the "marginal tax rate" dilemma, where the extra income above the Rs 50 lakh threshold is heavily taxed, while marginal increases in income can lead to only small increases in net disposable income. This disproportionate taxation structure creates a disincentive for individuals to exceed this threshold, despite the promise of financial success.

"Thus, for many middle to high-income earners, surpassing Rs 50 lakh can lead to a paradoxical situation where more income equates to lesser disposable income, ultimately resulting in a net loss despite higher earnings. The system needs a thoughtful revision to incentivize growth without penalizing the rising earners," Dr. Swapnil Sahoo added.

The Rs 50 Lakh Tax Cliff: When More Income Means Less in Hand

Earning just above Rs 50 lakhs in India can trigger a 10% surcharge on your income tax, effectively increasing your tax liability sharply. Earnings just above Rs 50 lakh attract a 10% surcharge on the tax amount. A tiny increase in income can spike your post-tax income-resulting in scenarios where the extra take could effectively be 0% or even negative.

"Understanding these hidden slab penalties is crucial not just from a compliance standpoint but for smarter financial planning. These surcharges are levied at multiple thresholds-Rs 50 Lakh, Rs 1 Crore, Rs 2 Crore; therefore, it cannot be emphasised enough that the real impact of crossing them should be weighed in," commented Kumar Binit, CEO, airpay money.

Without taking due action, individuals might end up penalising their take-home pay. They would have to strategise compensation planning accordingly to mitigate net income shocks and ensure that an increase in income translates to a meaningful financial gain.

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