If your salary is just above Rs 12 lakh, do you pay full tax of Rs 61,500?
New Delhi, Feb 5, 2025
Central Board of Direct Taxes (CBDT) has clarified that marginal relief applies to incomes up to Rs 12.75 lakh. This means individuals with incomes up to Rs 12.75 lakh won't pay full tax on the excess
Budget 2025 has proposed to make normal income up to Rs 12 lakh tax-free under the new tax regime for fiscal year 2025-26. This has become possible due to revised tax slabs and an enhanced rebate of Rs 60,000 under section 87A. However, ever since the announcement of revised tax slabs and rates under the new tax regime for FY 2025-26, there has been a lot of confusion about tax on incomes slightly above Rs 12 lakh. For example, what happens when a person is earning Rs 12.1 lakh or Rs 12.5 lakh?
If your salary is a little over Rs 12 lakh, say Rs 12.10 lakh, you might expect to pay Rs 61,500 in income tax. However, due to marginal relief, you won’t pay the full tax. This relief ensures that your total tax liability doesn’t exceed the tax you would have paid if your income were exactly Rs 12 lakh. So, while your tax on Rs 12.10 lakh would normally be Rs 61,500, marginal relief reduces it to Rs 25,000 (plus cess), saving you a significant amount in tax.
The Central Board of Direct Taxes (CBDT) has cleared the doubts, saying the total income till which marginal relief is available is near about Rs 12,75,000.
What is marginal tax relief?
Marginal tax relief is the relief provided by the income tax department when a person's income is marginally above the tax-free limit.
"Marginal relief is a provision that grants relief to a taxpayer whose income may have just exceeded the threshold of a higher tax bracket so that he / she does not have to pay a tax higher than the additional income. While income up to Rs 12.75 lakh will be tax-free in the hands of salaried individuals by virtue of the slab rates and rebate along with the standard deduction of Rs 75,000, for non-salaried individuals, the benefit of a standard deduction will be available in the form of marginal relief making income up to Rs 12.75 lakh tax-free for the non-salaried individuals as well. However, marginal relief will not be available for income exceeding Rs 12.75 lakh," said SR Patnaik, Partner (Head - Taxation), Cyril Amarchand Mangaldas.
Let's see how much tax one has to pay with or without marginal relief on incomes of Rs 12.1 lakh, Rs 12.5 lakh, and Rs 12.7 lakh, according to CBDT.
Examples of Tax Calculation with and without Marginal Relief
Rs 12.10 lakh income:
Tax without relief: Rs 61,500
Tax with relief: Rs 10,000
(Tax relief of Rs 51,500)
Rs 12.50 lakh income:
Tax without relief: Rs 67,500
Tax with relief: Rs 50,000
(Tax relief of Rs 17,500)
Rs 12.70 lakh income:
Tax without relief: Rs 70,500
Tax with relief: Rs 70,000
(Tax relief of Rs 500)
Rs 12.75 lakh income:
Tax without relief: Rs 71,250
Tax with relief: Rs 71,250
(No relief at this level)
How is Marginal Relief Calculated?
For an income of Rs 12.1 lakh, the tax payable without relief is Rs 61,500. This is broken down as follows:
Rs 0 tax on the first Rs 4 lakh
5% on Rs 4 lakh to Rs 8 lakh, amounting to Rs 20,000
10% on Rs 8 lakh to Rs 12 lakh, amounting to Rs 40,000
15% on Rs 12 lakh to Rs 12.1 lakh, amounting to Rs 1,500
But because of the Rs 60,000 rebate, tax on Rs 12 lakh is zero, and the marginal relief calculation is based on the excess income above Rs 12 lakh. For Rs 12.1 lakh, the excess income is Rs 10,000. The relief is calculated by subtracting Rs 10,000 from the total tax liability, reducing the tax payable to just Rs 10,000.
Marginal relief is available to resident individuals whose income exceeds Rs 12 lakh but does not exceed Rs 12.75 lakh. If a taxpayer’s income exceeds Rs 12.75 lakh, marginal relief no longer applies, and they will be subject to the regular tax rates.
Mr X, with a gross taxable income of Rs 14 lakh, claims deductions of Rs 1.75 lakh ( standard deduction of Rs 75,000 and deduction under Section 80CCD (2) for the NPS contribution by an employer for Rs 1 lakh). Although his income exceeds Rs 12 lakh, he’s not eligible for a rebate under Section 87A. Without marginal relief, his tax liability would be Rs 63,750. However, due to marginal relief, he pays only Rs 25,000, plus a 4% cess, making his final tax Rs 26,000. Marginal relief applies up to Rs 12.75 lakh, after which full tax is due according to the new tax slabs.
Rajarshi Dasgupta, Executive Director-Tax, AQUILAW explains the difference between salaried and non-salaried individuals and their tax exemptions:
Union Budget 2025 has raised the income tax exemption threshold to INF 12 lakhs effectively making incomes up to this amount tax-free. For salaried individuals, this limit increases to INR 12.75 lakh after factoring in the standard deduction of Rs 75,000.
For non salaried individuals earning just above Rs 12 lakh also stand to benefit through a mechanism known as marginal relief which otherwise ensures taxpayers with income slightly exceeding Rs 12 lakh but not above Rs 12.75 lakh are not subjected to disproportionately high tax rates. In simple words, marginal relief is available to resident individuals whose income exceeds Rs 12 lakh but does not exceed Rs 12.75 lakh. If a taxpayer’s income exceeds Rs 12.75 lakh, marginal relief no longer applies, and they will be subject to the regular tax rates.
To give an example, if a non-salaried individual earns Rs 12.1 lakh they would typically incur a tax liability of Rs 61,500 under the regular tax slabs. However, with marginal relief, this liability is substantially reduced to just Rs 10,000.
No marginal relief will be applicable if income exceeds Rs 12.75 lakh and will be taxed at normal slab rates.
[The Business Standard]
