Marginal Relief in Income Tax

Marginal relief in income tax is a mechanism that ensures taxpayers don’t pay a higher amount of tax than the extra income earned above the surcharge threshold. In the budget 2025, the government of India announced no income tax on up to ₹12 lakh under the new tax regime for FY 2025-26. Marginal relief in under Section 87A is applicable for those opting for the new tax regime in FY 25-26 with annual income up to ₹12.75 lakh.

The above marginal relief was announced in Budget 25-26, there exists another marginal relief mechanism for individuals who have high income. This marginal relief in income tax applies to those earning in excess of ₹50 lakh. If the annual income of tax payers exceeds the threshold limits of ₹50 lakh, ₹1 crore, ₹2 crore and ₹5 crore by a small margin, marginal relief mechanism ensures that the extra tax liability including surcharge is capped at the amount by which income exceeds the closest threshold limit.

The basic principle for marginal relief is:

Extra tax payable (including surcharge) should not exceed the amount by which the income exceeds the surcharge slab threshold.

This can be represented by the formula:

Marginal Relief = (Total Tax + Surcharge) - (Income - Threshold)

If the tax payable after surcharge exceeds the income above the surcharge limit, then marginal relief is granted to reduce the tax burden accordingly.

Marginal relief is applicable in both the old tax regime and the new tax regime introduced in recent years. Although the new tax regime offers generally lower income tax rates with fewer exemptions, surcharge slabs and their rates are still relevant and applied similarly to both tax regimes.

In both regimes, surcharge rates increase when income crosses specified thresholds (e.g., ₹50 lakh, ₹1 crore). Look at the table below to get a clear understanding of surcharge rates under the new tax regime versus the old tax regime:

As per current tax rules, this surcharge on income tax is capped at a maximum of 25% in the case of individuals opting for the old tax regime, while this can be as high as 37% for taxpayers opting for the old tax regime.

When income crosses a surcharge slab threshold, the tax liability can increase sharply due to the addition of a surcharge, which is a percentage applied to the tax payable as per the income tax slab rate. Without marginal relief, this jump can result in a situation where the extra tax payable far exceeds the additional income earned above the surcharge limit. This creates an unfair tax burden that can feel like a penalty for earning just a small amount more.

Marginal relief helps cap the tax increase. It ensures that the total tax (including surcharge) a taxpayer pays is not more than the income exceeding the surcharge slab. This means if your income barely crosses a surcharge threshold, the tax increase will be proportional and reasonable, preventing any unexpected spikes in your tax bill. Essentially, marginal relief smoothens the tax progression, making the transition across surcharge slabs less abrupt and more equitable.

For example, if the tax-free income threshold is ₹12 lakh and a taxpayer earns ₹12.1 lakh. Then, without marginal tax relief, the taxpayer would have a significantly higher tax liability compared to the increase in income. With marginal tax relief, the higher tax liability would be capped at ₹10,000. This helps taxpayers plan their finances more effectively, knowing that the income tax payable won’t spike suddenly due to minor fluctuations in income.

In order to claim marginal tax relief, taxpayers have to meet specific conditions. Here is the breakdown of who is eligible or ineligible for marginal relief in income tax:

A rebate under section 87A provides a full tax exemption for individuals earning up to ₹12 lakh. On the other hand, marginal relief is for those earning more than ₹12.75 lakh to prevent a situation where a small rise in income leads to a large increase in tax liability.

For taxpayers opting for the old tax regime, Section 87A rebate is applicable only to annual income up to ₹5 lakh. Resident tax payers who earn more than this annual taxable income limit are not eligible to avail this benefit. You can use an income tax calculator to ascertain how the rebate as well as marginal relief mechanism can impact your overall tax burden.