Marginal relief in income tax explained: Who it applies to and how it works under new vs old tax regime

According to the Union Budget for 2025-26, presented by Finance Minister Nirmala Sitharaman, starting from financial year 2026-27, there will be no income tax under the new regime on annual incomes of up to ₹12 lakh.

But what happens if your salary is slightly higher than that? In such cases, the government provides taxpayers with a benefit called marginal relief, which ensures that the additional tax payable does not exceed the amount by which your income crosses the ₹12 lakh threshold.

Earlier, marginal relief was only applicable to surcharges under the old tax regime. However, post- Budget 2024, this benefit is available in the new tax regime too. Here's how this benefit works in each tax regime.

How does it work under new tax regime?

For salaried individuals, this effective zero-tax threshold rises to ₹12.75 lakh after factoring in the standard deduction. While tax is still calculated according to tax slab rates, the rebate under Section 87A of the new regime offsets the liability up to the eligible income limit. This means even though the tax on ₹12 lakh income would be ₹60,000, taxpayers do not actually pay it because of the rebate.

For example, if your income slightly exceeds the rebate limit, say by ₹5,000, and if the benefit of marginal relief did not exist, then you would have to pay full ₹60,000 tax on your income, meaning a person who earns up to ₹12 lakh will have more money in hand despite earning less than you.

Marginal relief ensures that taxpayers do not face a disproportionately high tax burden when their income marginally exceeds the rebate threshold. For example, if your income reaches ₹12.5 lakh, your tax liability as per the new regime's slab rates would be ₹70,200, (including 4% health and education cess). However, after applying marginal relief, the tax payable gets restricted to ₹50,000, equal to the amount by which the income exceeds ₹12 lakh.

This benefit continues until the point where the regular slab-based tax becomes lower than than the marginal relief amount. For salaried individuals claiming the ₹75,000 standard deduction under the new regime, zero tax benefit is available up to a gross salary of ₹12.75 lakh.

Marginal relief can continue to apply on slightly higher salaries, broadly up to around ₹13.5 lakh, meaning you do pay tax but just a lower amount because of marginal relief. After this point, normal slab taxation takes over.

Marginal relief benefit under old tax regime

Marginal relief under the old tax regime is applicable in relation to a surcharge, meaning it is applicable on income exceeding ₹50 lakh on which a taxpayer is required to pay a surcharge.

If an individual's income goes slightly above the surcharge threshold, and the extra tax is more than the extra income earned, marginal relief comes into play and reduces the tax burden, similar to how it works in the new regime.

Let's say, your income is ₹51 lakh, which is slightly more than ₹50 lakh but does not exceed ₹1 crore, without marginal relief, you would have pay a surcharge at the rate of 10% on the income tax computed, leading to a significant increase in your overall tax liability.

In this case, the total tax payable would rise to around ₹12.21 lakh (before cess), compared to ₹10.8 lakh if the income remained at ₹50 lakh. In simple words, earning just ₹1 lakh extra could increase your tax burden by more than ₹1.4 lakh, which is disproportionately high.

The individual will get a marginal relief on the excess amount that goes beyond the additional income earned over ₹50 lakh. Therefore, the taxpayer becomes eligible for a marginal relief of ₹41,000, which is the difference between the additional tax payable and the additional income earned.

After applying this relief, the effective tax liability comes fown, and the final tax payable works out to around ₹12.27 lakh, including 4% health and education cess.