What is Marginal Relief?
Marginal relief is a provision of the Income Tax Act that aims to reduce the tax burden on individuals having an income within a specific range, especially those earning above Rs.50 lakhs.
The application of a surcharge on income exceeding a certain threshold can sometimes lead to a significant increase in tax liability for individuals whose income exceeds the threshold marginally. Marginal relief aims to ensure tax relief for such individuals. Marginal relief is only applicable on individuals who are opting for the new tax regime and is not available to those opting for the new tax regime.
Marginal Relief in Old Tax Regime
Marginal relief in the old tax regime is applicable in relation to a surcharge. In simple terms, it is applicable on income exceeding Rs.50 lakhs, on which you are required to pay a surcharge. Marginal relief can be claimed on surcharge in the case of both the old and the new regime.
For instance, if an individual's income surpasses Rs. 50 lakh, marginal relief applies. This ensures that the income tax due (including surcharge) on Rs. 50 lakh does not exceed the surplus income above Rs. 50 lakh.
To illustrate, let's consider an individual with an income of Rs. 50.1 lakh:
As the income exceeds Rs. 50 lakh but remains below Rs. 1 crore, the individual incurs a surcharge at a rate of 10%, leading to a significant increase in his/her tax liability.
| Total Income |
Rs. 50,10,000 |
| Tax on total income as per slab rate (excluding surcharge) |
Rs. 11,88,000 |
| Surcharge @10% |
Rs. 1,18,800 |
| Total Tax payable (inclusive of surcharge) |
Rs. 13,06,800 |
If the income were Rs. 50 lakh, the tax payable would be Rs. 11,85,000 (before surcharge). Therefore, with an increase of Rs. 10,000 in income, the tax liability increases by Rs. 1,21,800. To address this scenario, marginal relief provisions are offered to taxpayers, preventing such significant spikes in tax liabilities.
Marginal Relief Calculation
Let’s take the above example and learn the calculation of marginal relief -
-
Step 1: Calculation of income tax and surcharge
| Calculation |
Amount |
| Income tax inclusive of surcharge on Rs. 50,10,000 |
Rs. 13,06,800 |
-
Step 2: Comparison of additional income and incremental tax
- Incremental salary: Rs.(50,10,000 - 50,00,000) = Rs. 10,000
-
Incremental Tax:
- Income tax inclusive of surcharge on Rs. 50,10,000: Rs. 13,06,800
- Income tax on Rs. 50,00,000: Rs. 11,85,000
- Incremental Tax = Rs. 13,06,800 - Rs. 11,85,000 = Rs. 1,21,800
Since the incremental tax (Rs. 1,21,800) exceeds the incremental income (Rs. 10,000), the assessee qualifies for Marginal Relief. The total incremental tax, inclusive of the surcharge, will be capped at Rs. 10,000 based on the concept of marginal relief.
-
Step 3: Calculation of Surcharge considering marginal relief
| Calculation |
Amount |
| Total income: |
Rs. 50,10,000 |
| Tax on total income as per slab rate (excluding surcharge) |
Rs. 11,88,000 |
| Addition of Surcharge after considering marginal relief |
Rs. 7,000 |
| Tax payable after applying for marginal relief |
Rs. 11,95,000 |
Marginal Relief in New Tax Regime
In Budget 2024, marginal relief, previously applicable only to surcharges in the old regime, was extended to the new tax regime. Under the new regime, the marginal relief provision is applicable to rebates u/s 87A.
This amendment will help reduce the tax liability for those individuals whose annual income exceeds the limit of Rs.7.5 lakhs marginally.
Let us see how this works -
As per budget 2025, income from Salary up to Rs.12.75 lakh is tax-free.
Here is the calculation -
| Income (A) |
Rs 12.75 lakh |
| Standard deduction (B) |
Rs 75,000 |
| Taxable income (A-B) |
Rs 12 lakh |
| Tax liability (C) |
Rs 60,000 |
| Tax rebate (D) |
Rs 60,000 |
| Tax outgo (C-D) |
ZERO |
What if the salary is Rs. 12.85 Lakh?
| Particulars |
Amount (Rs) |
| Total income |
Rs. 12,85,000 |
| Standard deduction |
Rs. 75,000 |
| Taxable income |
Rs. 12,10,0000 |
| Tax on income up to Rs. 4 lakh |
Nil |
| Tax (@5%) on income between Rs. 4 lakh and Rs. 8 lakh |
Rs. 20,000 |
Tax (@ 10%) on income between Rs. 8 lakh and Rs. 12 lakh
Tax (@ 15%) on remaining 10,000 income Rs. 1,500 |
Rs. 40,000 |
| Total tax excluding cess |
Rs. 61,500 |
| Total tax, including cess (4% of tax payable) |
Rs. 63,960 |
This implies that earning just 10,000 more in salary increases your tax liability from ‘0’ to ‘63,960’, which is a significant increase.
According to the marginal tax relief, the tax amount owed on income between Rs. 12,75,000 and Rs. 13,45,587 is based on the additional income above Rs. 12.75 lakh, rather than the tax rate slabs. This helps reduce the tax liability in a case where a slight increase in taxable income significantly increases the tax liability. Thus, the actual tax owed will be Rs. 10,400 instead of Rs. 63,960.
Refer to the table below for actual tax liabilities at different income levels.
Marginal Relief In The New Tax Regime
| Annual income |
Taxable income after standard deduction |
Tax liability |
Actual tax liability after Marginal Relief |
Marginal relief |
| 12,80,000 |
12,05,000 |
60,7500 |
5,000 |
55,750 |
| 12,90,000 |
12,15,000 |
62,2500 |
15,000 |
47,250 |
| 13,00,000 |
12,25,000 |
63,750 |
25,000 |
38,750 |
| 13,20,000 |
12,45,000 |
66,750 |
45,000 |
21,750 |
| 13,40,000 |
12,65,000 |
69,750 |
65,000 |
4,750 |
| 13,45,588 |
12,70,588 |
70,588 |
70,588 |
0 |
When we talk about taxes, tax saving is the primary objective of every taxpayer. Having said that, there are numerous provisions in the Income Tax Act to help taxpayers reduce their tax liability. However, taxes are complicated, and making sure to claim all the possible deductions and exemptions is difficult, especially for laymen.
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