Introduction
Crossing a tax threshold can sometimes lead to a sudden and disproportionate increase in tax liability. This is where the concept of marginal relief becomes important. Under the Indian Income Tax Act, marginal relief ensures that a small increase in income does not result in an excessively higher tax burden. Whether it is surcharge under the old regime or the rebate cliff under the new tax regime (Section 115BAC), marginal relief acts as a protective mechanism for taxpayers. In this blog, we will understand when marginal relief applies and how it works in different situations.
Marginal Relief and Surcharge Thresholds
Marginal relief is primarily applicable when your total income exceeds the thresholds for Surcharge (₹50 Lakhs, ₹1 Crore, ₹2 Crores, or ₹5 Crores). It is available to Individuals, HUFs, Firms, and Companies.
The Problem it Solves
Imagine you earn ₹50,01,000. Under the old regime, because you crossed the ₹50 Lakh threshold, a 10% surcharge is applied to your entire tax amount. Without relief, those extra ₹1,000 in earnings could result in several thousand rupees of additional tax.
Marginal Relief under New Tax Regime (Section 115BAC)
Under the New Tax Regime, specifically Section 115BAC, marginal relief applies when your total income exceeds ₹7 Lakhs. This provision is crucial for addressing the rebate cliff that arises from Section 87A.
The core principle is that the tax payable should not exceed the amount by which your income surpasses ₹7 Lakhs.
For instance, if your income is ₹7,05,000, the maximum tax payable will be capped at ₹5,000 (which is the excess of ₹7,05,000 over ₹7 Lakhs).
Marginal Relief under the New Tax Regime (Section 115BAC)
The Finance Act 2023 introduced a specific marginal relief for the New Tax Regime to address the “Tax Rebate” cliff.
Under the new regime, if your income is up to ₹7 Lakhs, you pay zero tax due to the rebate under Section 87A. However, if you earn ₹7,01,000, you would technically owe tax on the entire amount.
The Relief: The tax payable cannot exceed the amount by which the income exceeds ₹7 Lakhs.
Example: If you earn ₹7,05,000, your tax is capped at ₹5,000 (the excess over 7L), rather than the slab-calculated tax which would be much higher.
