Understanding Marginal Income Tax Relief for FY 2025-26
The Budget 2025 brought about significant changes to the income tax regime, including provisions for marginal income tax relief. This new relief is designed to benefit taxpayers whose income exceeds the ₹12 lakh threshold but is still close to it. Let’s dive into how marginal income tax relief works, how it is calculated, and the tax implications for the financial year 2025-26.
What is Marginal Income Tax Relief?
Marginal Income Tax Relief is a provision offered by the Income Tax Department to prevent taxpayers from being overburdened with taxes when their income slightly exceeds the tax-free limit. For the financial year 2025-26, the income tax slab has been revised, and the government has proposed to make income up to ₹12 lakh tax-free under the new tax regime.
However, for incomes just above ₹12 lakh, tax liability may still arise. Marginal relief helps reduce this tax burden by providing relief for income that exceeds the threshold only slightly.
Why is Marginal Relief Important?
Without marginal relief, a person earning just ₹12,01,000 could end up paying a significant amount in tax, even though their income is just slightly above the tax-free limit. The relief ensures that such individuals only pay a fair share of tax without being penalized for minor income increments.
How Marginal Income Tax Relief is Calculated
Understanding how marginal tax relief is calculated can help you plan your finances better. Here’s a step-by-step explanation of how the CBDT (Central Board of Direct Taxes) defines marginal relief calculations for incomes just above ₹12 lakh.
Marginal Tax Relief for Different Income Levels
Let’s take a look at a few examples to understand how the tax calculation works for various income levels close to ₹12 lakh.
| Income (₹) | Tax Payable without Marginal Relief (₹) | Tax Payable with Marginal Relief (₹) |
|---|---|---|
| ₹12,10,000 | ₹61,500 | ₹10,000 |
| ₹12,50,000 | ₹67,500 | ₹50,000 |
| ₹12,70,000 | ₹70,500 | ₹70,000 |
| ₹12,75,000 | ₹71,250 | ₹71,250 (No Marginal Relief) |
As per the CBDT, marginal relief applies to income up to ₹12,75,000. However, no relief is given for incomes exceeding this amount. The tax payable after marginal relief will be considerably lower than the total tax amount without it.
Tax Calculation Example for Income of ₹12.1 Lakh
Let’s break down the calculation for an individual earning ₹12.1 lakh.
- Step 1: Without Marginal ReliefTax is calculated based on the new income tax slabs for the financial year 2025-26.
| Income Range | Tax Rate | Tax Amount (₹) |
|---|---|---|
| ₹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 – ₹12,10,000 | 15% | ₹1,500 |
Total tax payable (without relief): ₹61,500
- Step 2: Apply Marginal Relief
The marginal relief ensures that the tax payable is adjusted for income just above ₹12 lakh. The amount exceeding ₹12 lakh is ₹10,000 (₹12,10,000 – ₹12,00,000). Subtract this from the total tax of ₹61,500.
Marginal relief (₹51,500) = ₹61,500 – ₹10,000
Therefore, the total tax payable with marginal relief will be ₹10,000.
The Key to Understanding Marginal Relief
The essence of marginal relief lies in the concept of equitable tax adjustment. When a taxpayer’s income is only slightly above the ₹12 lakh threshold, the relief allows them to avoid paying a disproportionately higher tax amount, providing them with a fairer tax outcome.
The ₹12 Lakh Tax-Free Limit: How Does It Work?
For the financial year 2025-26, under the revised new tax regime, income up to ₹12 lakh is completely tax-free. Thanks to the enhanced rebate of ₹60,000 under Section 87A, individuals earning up to ₹12 lakh will not have to pay any income tax.
However, the situation changes when the income slightly exceeds ₹12 lakh. The marginal relief steps in to ensure that taxpayers are not penalized harshly for earning a little above the limit.
When Does Marginal Relief End?
According to the CBDT’s guidelines, marginal relief does not apply for incomes exceeding ₹12,75,000. At this point, the individual will be required to pay the full tax according to the applicable income tax slabs without any reduction from marginal relief.
Conclusion
The marginal income tax relief under the financial year 2025-26 offers significant benefits for individuals whose income is just above the ₹12 lakh threshold. With the new tax regime and enhanced rebates under Section 87A, taxpayers can now rest assured that their tax liabilities won’t spike dramatically for small income increases.
For individuals earning close to ₹12 lakh, understanding how marginal relief works can help reduce unnecessary tax burdens and ensure a fair tax calculation. Always consult with a tax professional for personalized advice and guidance on the best ways to manage your tax planning.
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