Key Highlights:
- Marginal relief in income tax prevents excessive tax burdens when income slightly crosses a tax slab.
- It is calculated as the excess tax payable over the additional income.
- Budget 2025 retains marginal relief to ensure fair taxation for taxpayers.
- Salaried individuals, pensioners, and small business owners benefit the most from this provision.
- Marginal relief applies in both personal income tax and corporate tax scenarios to maintain a fair tax structure.
Marginal relief in income tax is a benefit provided to taxpayers when their income slightly exceeds a tax-free limit, ensuring they do not pay an excessively high tax compared to their income increase. For FY 2025-26, the tax-free income limit is ₹12 lakh. If a taxpayer’s income exceeds this limit marginally, marginal relief reduces the tax burden to make it more reasonable.
Simply put, it prevents taxpayers from paying significantly more tax just because their income has gone slightly above the exemption limit.
Rebate vs. Marginal Relief
Many taxpayers confuse rebate with marginal relief, but they serve different purposes:
- Rebate under Section 87A: A rebate reduces the tax liability for individuals earning up to a specified income level. If the total taxable income is below this limit, the taxpayer gets a full or partial rebate, making them effectively tax-free.
- Marginal Relief: This applies when a taxpayer’s income exceeds the rebate or exemption limit by a small amount, preventing them from paying an excessive tax compared to their actual income increase.
Key Difference: A rebate completely waives off tax up to a certain limit, while marginal relief reduces the additional tax burden for those whose income slightly exceeds the threshold.
How is Marginal Relief Calculated?
Marginal relief is applied when the additional tax payable on income exceeding a specific threshold is higher than the income exceeding that threshold. It is computed as:
Marginal Relief = Additional Tax Payable – Excess Income Over the Threshold
Example Based on Budget 2025:
The Central Board of Direct Taxes (CBDT) has outlined marginal relief calculations for the following income levels under the new tax regime: ₹12,10,000, ₹12,50,000, and ₹12,70,000. Marginal relief does not apply beyond ₹12,75,000.
| 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) |
Case 1: Income = ₹12,10,000
- Tax before marginal relief = ₹61,500
- Excess income over ₹12,00,000 = ₹10,000
- Marginal relief = ₹61,500 – ₹10,000 = ₹51,500
- Final tax payable after marginal relief = ₹10,000
Case 2: Income = ₹12,50,000
- Tax before marginal relief = ₹67,500
- Excess income over ₹12,00,000 = ₹50,000
- Marginal relief = ₹67,500 – ₹50,000 = ₹17,500
- Final tax payable after marginal relief = ₹50,000
Case 3: Income = ₹12,70,000
- Tax before marginal relief = ₹70,500
- Excess income over ₹12,00,000 = ₹70,000
- Marginal relief = ₹70,500 – ₹70,000 = ₹500
- Final tax payable after marginal relief = ₹70,000
For income above ₹12,75,000, marginal relief is not applicable as the tax payable without relief is already proportionate to the income increase.
Who Benefits from Marginal Relief?
Marginal relief in income tax is particularly helpful for:
Investors earning dividends or capital gains that push them slightly into a higher tax bracket.
Salaried individuals and small business owners whose income slightly crosses a higher tax slab.
Senior citizens who receive pension income and may face higher taxation if marginal relief is not applied.
Marginal relief is a crucial provision in the Indian tax system, ensuring that individuals and businesses do not face an unfairly high tax burden when their income slightly exceeds a tax-free threshold. As highlighted in Budget 2025, this relief continues to protect taxpayers from paying disproportionately higher taxes due to minor income increases.
For salaried professionals, pensioners, and small business owners, marginal relief provides much-needed tax optimization, making the system more equitable. Understanding how it works allows taxpayers to plan their finances efficiently and take advantage of this benefit where applicable. With the government retaining this provision, it reinforces the principle of fair taxation, ensuring that income growth is encouraged rather than penalized.
