Why pay more tax when marginal relief is there?

I heard about marginal relief but don't really understand what it is. Can you explain? - Anonymous

The government gives a tax rebate under Section 87A of the Income Tax Act, which effectively means that if your taxable income is within a certain limit, you do not have to pay any tax.

However, if your income goes even Rs 1 above this limit, you lose the rebate and suddenly have to pay a large tax amount.

Marginal relief helps in such cases.

Income limits eligible for a full tax rebate under Section 87A

• For FY 2024-25
  
• New tax regime: No tax if income is Rs 7 lakh or less (full rebate up to Rs 25,000)
  
• Old tax regime: No tax if income is Rs 5 lakh or less (full rebate up to Rs 12,500)
• For FY 2025-26
  
• New tax regime: No tax if income is Rs 12 lakh or less (full rebate up to Rs 60,000)
  
• Old tax regime: No tax if income is Rs 5 lakh or less (remains unchanged)

How marginal relief works

Let's say in FY 2025-26, under the new tax regime, the tax-free limit is Rs 12 lakh. If a person earns Rs 12,01,000 (just Rs 1,000 above the limit) without marginal relief, they would lose the entire rebate and have to pay a high tax amount. But with marginal relief, their extra tax will be limited to Rs 1,000—the exact amount their income exceeded Rs 12 lakh.

This rule ensures that a small increase in income does not result in an unfairly high tax burden.

To understand this in detail with examples, read here: Earning over Rs 12 lakh? Marginal relief reduces tax

This article was originally published on March 18, 2025.