Budget 2025 Marginal Relief: Earning Just Over ₹12 Lakh? Here’s Your Rescue

10 February, 2025

Synopsis

• Finance Minister Nirmala Sitharaman's Budget 2025 introduces important changes to income tax through marginal relief provisions.
• New tax regime exempts income up to ₹12 lakh (₹12.75 lakh for salaried taxpayers with standard deduction) from taxes.
• Marginal relief under Section 87A ensures tax on income exceeding ₹12 lakh doesn't exceed the incremental amount up to ₹12.75 lakh.
• Benefits resident individuals with taxable income between ₹12-12.75 lakh, preventing disproportionate taxation on small income increases.

The Union Budget 2025, presented by Finance Minister Nirmala Sitharaman, introduced several measures aimed at easing the tax burden for individual taxpayers. A highlight of this year’s budget is the increased income tax rebate threshold under the new tax regime, which now exempts individuals earning up to ₹12 lakh annually from paying taxes. For salaried taxpayers, this limit goes up to ₹12.75 lakh, thanks to the standard deduction.

But what happens if your income slightly exceeds ₹12 lakh? Let’s break this down step by step, explain what marginal relief is, and show how it can help you.

What Is Marginal Relief?

Marginal relief is a provision under Section 87A of the Income Tax Act. It ensures that taxpayers whose income exceeds ₹12 lakh by a small margin do not pay more tax than their incremental income. Without marginal relief, a small increase in income above ₹12 lakh could lead to a disproportionately higher tax liability.

How Marginal Relief Works for Income Slightly Above ₹12 Lakh

Marginal relief ensures that the additional tax payable does not exceed the incremental income over ₹12 lakh. This means.

• If your income exceeds ₹12 lakh by ₹10,000, the maximum additional tax you’ll pay is ₹10,000.

• Marginal relief applies only to incomes up to ₹12.75 lakh, after which normal tax calculations apply.
  
  

Let’s simplify this with an example.

Scenario: Mr. A’s Tax Calculation

1. Gross Taxable Income: ₹14,00,000.

• Mr. A earns a gross taxable salary of ₹14 lakh.

2. Deductions Available: Even under the new tax regime, taxpayers can utilise specific deductions to lower their taxable income.

   > Standard Deduction: ₹75,000 (under the new tax regime).

   > Employer Contribution to NPS (Section 80CCD (2)): ₹1,00,000.

    > Total Deductions: ₹1,75,000.

3. Net Taxable Income:

  >  Gross Income - Total Deductions = ₹14,00,000 - ₹1,75,000 = ₹12,25,000.

Tax Liability Without Marginal Relief

Since Mr. A’s taxable income exceeds ₹12 lakh, he is not eligible for the rebate under Section 87A. His tax liability is calculated based on the slab rates:

Thus, without marginal relief, Mr. A would owe ₹63,750 in taxes (excluding 4% cess).

Tax Liability With Marginal Relief

Marginal relief ensures that the additional tax payable does not exceed the incremental income above ₹12 lakh. Here’s how it works:

1. Incremental Income: ₹12,25,000 - ₹12,00,000 = ₹25,000.
   
   

2. Excess Tax Without Relief: ₹63,750 (calculated above) - ₹0 (tax on ₹12 lakh) = ₹63,750.
   
   

3. Marginal Relief Applied: Tax payable is capped at the incremental income, i.e., ₹25,000.
   
   

With marginal relief, Mr. A’s tax liability is reduced to ₹25,000. Adding a 4% cess, the final tax payable becomes:

• ₹25,000 + 4% (cess) = ₹26,000
  
  

Comparison: Tax With and Without Marginal Relief

To illustrate further, here’s how the tax liability changes for different income levels:
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Break-Even Point

• Marginal Relief Limit: Taxpayers can claim marginal relief only until their taxable income reaches ₹12,75,000. Beyond this point, marginal relief no longer applies, and taxes are calculated based on standard slab rates.

• At ₹12,75,000, the tax liability with and without marginal relief becomes equal (₹71,250).
  
  

Who Can Claim Marginal Relief?

Marginal relief is a targeted provision designed for:

1. Resident Individuals: It applies to both salaried and non-salaried resident taxpayers.
   
   

2. Income Range: Applicable for taxable incomes between ₹12,00,000 and ₹12,75,000.
   
   

3. Not Eligible: Non-residents, Hindu Undivided Families (HUFs), and other entities are not eligible for marginal relief.
   
   

How Marginal Relief Benefits Taxpayers

• Prevents Disproportionate Taxation: A small increase in income won’t lead to an unexpectedly large tax burden.

• Encourages Earning More: Individuals can accept higher income opportunities without the fear of being heavily taxed.

• Supports Middle-Class Households: By reducing the tax pinch, marginal relief leaves more disposable income in the hands of taxpayers.
  
  

Marginal relief is a thoughtful provision introduced to prevent taxpayers from being penalised for small increases in income. It provides much-needed relief and ensures that those earning just over ₹12 lakh don’t face an unfair tax burden. If you’re a taxpayer within this bracket, understanding and claiming marginal relief can save you a significant amount in taxes.

With a structured approach, you can plan your finances better and ensure tax efficiency under the new regime.
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*Disclaimer: Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.