What is Marginal Relief in Income Tax? Save Taxes in New Regime

The Union Budget 2025 has unveiled that an individual earning up to ₹12 lakhs in a year is not required to pay any tax. But what about those who are earning slightly above the ₹12 lakhs mark? This is where marginal relief comes into play and helps reduce total tax liability. In this blog, we’ll understand in detail about what is marginal relief in income tax and how it can help you save taxes if you are earning just above ₹12 lakhs.

Also read: It’s ₹12 Lakhs? No Need to Pay Tax up to ₹13.7 Lakhs: Budget Bonanza

Meaning of Marginal Relief in Income Tax

Marginal relief in the new income tax regime is applicable to individuals who have earnings above ₹12 lakhs but less than ₹12.75 lakhs in a year. It helps in reducing incremental tax liabilities when income rises marginally above the no-income tax threshold.

Marginal relief should not be confused with the tax rebate. A rebate is a deduction on the tax payable on up to the income of ₹12 lakhs in the new tax regime. The tax rebate limit has been increased from ₹25,000 to ₹60,000 in the Union Budget 2025. The marginal relief ensures that the resident individual who has an income above ₹12 lakhs but below ₹12.75 lakhs does not end up paying the tax more than the incremental income.

Tax Liability: Before and After Marginal Relief

Here is how much total tax you need to pay with or without marginal tax relief on the total income of ₹12.50 lakhs in the new regime.

The tax liability on the basis of slab rates comes out to be ₹67,500. After applying the provision of marginal relief, it ensures that the person earning marginally above ₹12 lakhs will pay only the marginal amount as tax up to the income above ₹12 lakhs. It means that his carry home income remains ₹12 lakhs and he pays only the tax of ₹50,000.

How to Calculate Marginal Relief in Income Tax​?

The step-by-step guide for calculating marginal relief in the new tax regime is as follows:

1. Firstly, calculate the tax liability on the basis of applicable tax slab rates in the new tax regime.
2. Compute the tax liability up to ₹12 lakhs income which is nil after the rebate.
3. Calculate the difference between the income till the rebate and the income actually earned which is ₹50,000 in this case.
4. Deduct the extra income from the tax liability to compute marginal relief. In this case, it is (₹67,500 – ₹50,000 = ₹17,500).
5. The total tax liability with marginal tax relief is now (₹67,500 – ₹17,500 = ₹50,000).

Taxation on Different Income After Marginal Relief

Here is how you can save on your tax with the help of marginal relief at different income levels:

How Marginal Relief is Applied after Deductions?

The marginal relief is actually claimed on the taxable income and not on the annual income. This means that after applying the applicable deductions of the new regime, you can certainly reduce your taxable income and avail the benefit of marginal relief at higher income.

For example, if your annual (gross) salary income is ₹14 lakhs in a year. You can avail the standard deduction of ₹75,000 and the deduction of NPS contribution by the employer (Section 80CCD (2)) of ₹1 lakh. This means you can deduct ₹1.75 lakhs from your gross salary which turns out to be ₹12.25 lakhs.

Therefore, your final (net) taxable income is ₹12,25,000 and your tax liability as per the slab rates will be ₹63,750 (Nil @ ₹4 lakhs + 5% @ ₹4 lakhs + 10% @ ₹4 lakhs + 15% @ 25,000).

After the marginal relief, you will only be entitled to pay the tax of ₹25,000. This means that you can claim the marginal tax relief benefit even after claiming all the deductions available in the new tax regime.

Conclusion

Marginal tax relief has provided much-needed relaxation for taxpayers whose taxable income is slightly above the ₹12 lakhs threshold. This helps the taxpayers avoid the payment of a large sum of tax if the income exceeds the threshold mark. Additionally, it helps in increasing savings and investments as more money is left in the hands of people. If you are looking to invest your extra income in stocks or mutual funds, then open free Demat Account with SMC Global Securities today.

Frequently Asked Questions – FAQs

1. What is meant by marginal relief?

Marginal relief as the term suggests provides the relief on the tax when the income slightly moves above the no-tax threshold. This helps avoid a high jump in tax liability when there is a small increase in income.

2. What is the marginal relief under section 87A?

Marginal relief under Section 87A is applicable in the new tax regime wherein your final tax liability does not exceed the difference between the income of more than ₹12 lakhs and the tax rebate income level.

3. What is the marginal relief section on surcharge?

The marginal relief on surcharge is applicable when the income exceeds the ₹50 lakhs. It ensures that tax liability and surcharge do not exceed the tax liability on income exceeding ₹50 lakhs by more than incremental income above ₹50 lakhs.

Reference:
https://incometaxindia.gov.in/Documents/Budget/budget-2025/faqs-budget-2025.pdf

Author: All Content is verified by SMC Global Securities.