Table of Contents
- Income Thresholds for Full Tax Rebate under Section 87A
- The Functionality of Marginal Relief
- The Change at Rs 12 lakh
- Detailed Look at Marginal Relief
- Conclusion
Understanding Marginal Relief: A Simplified Explanation
Marginal relief is a provision that helps taxpayers who are on the verge of losing a tax rebate due to a slight increase in their income. This is particularly relevant under Section 87A of the Income Tax Act, which provides a tax rebate for individuals whose taxable income is within a certain threshold. If your income exceeds this threshold even by a single rupee, you can lose the entire rebate, leading to a significant tax burden. Marginal relief addresses this issue.
Income Thresholds for Full Tax Rebate under Section 87A
- For FY 2024-25
- New tax regime: Full rebate up to Rs 7 lakh (no tax)
- Old tax regime: Full rebate up to Rs 5 lakh (no tax)
- For FY 2025-26
- New tax regime: Full rebate up to Rs 12 lakh (no tax)
- Old tax regime: Full rebate remains at Rs 5 lakh
The Functionality of Marginal Relief
Consider a scenario in FY 2025-26 under the new tax regime, where the tax-free threshold is set at Rs 12 lakh. If an individual’s income is Rs 12,01,000, which is just Rs 1,000 above the limit, they would typically lose the rebate and face a high tax amount. However, marginal relief ensures that their additional tax is limited to just Rs 1,000, which is the amount by which their income exceeded the threshold.
This rule safeguards taxpayers from encountering a disproportionately high tax burden due to minor income increases.
The Change at Rs 12 lakh
In the Union Budget 2025-26, the Section 87A rebate was raised to Rs 60,000, allowing those with a taxable income of up to Rs 12 lakh to enjoy a complete tax exemption under the new tax regime. However, crossing this threshold—even marginally—results in the loss of the rebate and a sudden rise in tax obligations.
Marginal relief comes into play here, ensuring that a minor income excess doesn’t lead to an unfair spike in tax.
Detailed Look at Marginal Relief
Scenario 1: Without Marginal Relief (Income: Rs 12.05 lakh)
Suppose your taxable income (after applying the Rs 75,000 standard deduction) amounts to Rs 12.05 lakh. Without marginal relief, your tax liability would total Rs 60,750, as detailed below:
| Income Slab (Rs) | Tax Rate | Tax Amount (Rs) |
|---|---|---|
| 0 – 4,00,000 | 0% | 0 |
| 4,00,001 – 8,00,000 | 5% | 20,000 |
| 8,00,001 – 12,00,000 | 10% | 40,000 |
| 12,00,001 – 12,05,000 | 15% | 750 |
Total Tax Without Marginal Relief:
Rs 60,750
(No rebate applicable as income exceeds Rs 12 lakh)
Scenario 2: With Marginal Relief
- If your income exceeds Rs 12 lakh by Rs 5,000, marginal relief guarantees that your total tax liability does not surpass Rs 5,000 (the surplus over Rs 12 lakh).
- Therefore, tax payable would be Rs 5,000 instead of Rs 60,750.
Illustrating the Benefits of Marginal Relief: A Quick Overview
| Taxable income after standard deduction | Tax without marginal relief (Rs) | Tax with marginal relief (Rs) | Savings (Rs) |
|---|---|---|---|
| Rs 12,01,000 | 60,150 | 1,000 | 59,150 |
| Rs 12,03,000 | 60,450 | 3,000 | 57,450 |
| Rs 12,05,000 | 60,750 | 5,000 | 55,750 |
| Rs 12,10,000 | 61,500 | 10,000 | 51,500 |
| Rs 12,15,000 | 62,250 | 15,000 | 47,250 |
| Rs 12,25,000 | 63,750 | 25,000 | 38,750 |
| Rs 12,50,000 | 67,500 | 50,000 | 17,500 |
| Rs 12,60,000 | 69,000 | 60,000 | 9,000 |
| Rs 12,70,000 | 70,500 | 70,000 | 500 |
As illustrated, marginal relief benefits those whose income just surpasses Rs 12 lakh, ensuring they pay tax only on the excess amount instead of experiencing a sharp tax escalation.
Conclusion
For those earning slightly above Rs 12 lakh, marginal relief plays a crucial role in minimizing tax liability. While this concept may not be widely recognized, it significantly eases the financial strain for many taxpayers.
So, when you receive a modest salary increase that nudges you just past the Rs 12 lakh mark, remember that marginal relief is designed to support you by keeping your tax burden in check!
Stox N Tax 
Leave a comment