Marginal Relief in Income Tax for FY 2025-26

Union Budget 2025 Updates on Marginal Relief

The Union Budget 2025 declared the following key changes in the taxation for FY 2025-26:

• Under the new tax regime, income up to ₹12 lakh (₹12.75 lakh for salaried taxpayers with standard deduction) is tax-exempt.

• For FY 2025-26 (starting April 1, 2025), the rebate limit has been raised from ₹25,000 to ₹60,000, making marginal relief available for incomes just over ₹12 lakh.

• Marginal relief under Section 87A ensures that the tax on income exceeding ₹12 lakh does not go beyond the incremental amount up to ₹12.75 lakh.

• This relief is beneficial for resident individuals with taxable income between ₹12 lakh and ₹12.75 lakh, preventing a sharp tax increase on small income rises.

What is Marginal Relief in Income Tax in India for FY 2025-26?

Marginal Relief in Income Tax in India is a provision that helps taxpayers avoid a significant increase in their tax liability when their income exceeds a certain limit, which pushes them into a higher tax bracket. This relief ensures that the additional tax paid is proportional to the increase in income. It mainly applies to individuals earning just above ₹12 lakhs income in FY 2025-26, whose taxable income does not fall in zero income tax slab bracket. With this relief, taxpayers are protected from paying a disproportionately higher tax due to a small rise in income. However, the marginal relief is not available to individuals earning total income above ₹12.75 lakhs.

Rebate vs. Marginal Relief:

A rebate under Section 87A offers a full tax exemption for those earning up to ₹12 lakh. Marginal relief is for those earning slightly more to prevent a situation where a small increase in income leads to a disproportionately large increase in tax liability.

Who Can Claim Marginal Relief in Income Tax in India?

1. Eligibility for Marginal Relief (2025):

   • Available only for resident individuals.

   • Applies to taxable income between ₹12,00,000 and ₹12,75,000.

   • Both salaried and non-salaried individuals can benefit.

2. Ineligibility for Marginal Relief (2025):

   • Not applicable to Non-Resident Indians (NRIs) or Hindu Undivided Families (HUFs).

   • If income exceeds ₹12.75 lakh, marginal relief does not apply, and regular tax rates will be charged.

Latest Slabs under New Tax Regime in FY 2025-26

How to Calculate Marginal Tax Relief for Total Income Above ₹12 Lakhs?

Let us compute the marginal relief in income tax for a resident salaried individual earning ₹14,00,000 in FY 2025-26:

• Gross Income = ₹15,00,000

• Deductions Available:

  • Standard Deduction under Section 16(ia) = ₹75,000

  • Employer’s contribution to NPS under Section 80CCD(2) = ₹1,50,000

  • Additional Deduction from NPS under Section 80CCD(1B) = ₹50,000

  • Total Deduction = ₹2,75,000

• Net Taxable Income = ₹15,00,000 - ₹2,75,000

• Net Income = ₹12,25,000

Income Tax Without Marginal Relief in Income Tax

• Total Tax Without Marginal Relief = ₹63,750

• Tax Rebate Eligibility under Section 87A = ₹0 tax on ₹12,00,000 total income

• Excess Income Above ₹12,00,000 = ₹12,25,000 - ₹12,00,000 = ₹25,000

• Compute Marginal Relief: 

  • Excess Tax: ₹63,750

  • Excess Income: ₹25,000

  • Marginal Relief: ₹63,750 - ₹25,000 = ₹38,750

• Tax Payable with Marginal Relief = ₹63,750 - ₹38,750 = ₹25,000

• Adding 4% Cess = ₹25,000 + 4% = ₹26,000 (Total Tax)

• Summary: 

  • Original Tax Liability: ₹63,750

  • Marginal Relief: ₹38,750

  • Tax Payable: ₹25,000

  • Final Tax Payable with Marginal Relief with 4% Cess: ₹26,000

This is how marginal relief reduces the tax payable when the income exceeds ₹12 lakh but by a small margin, ensuring that only the additional tax on that excess amount is payable.

IMPORTANT NOTE:

• Marginal relief is available for surcharges in both old and new tax regimes for FY 2025-26.

• However, no relief for taxpayers eligible for Section 87A rebate under the old regime.

• The new regime continues to offer marginal relief on tax rebates as well as for surcharge purposes.

Marginal Relief for Surcharge in Income Tax

Marginal relief in income tax helps reduce the tax burden on individuals whose income slightly exceeds specific thresholds, such as ₹50 lakh. It ensures that the additional tax liability due to surcharges does not excessively impact taxpayers. 

• The relief is calculated as the difference between the excess tax payable and the income exceeding the threshold.

• For the new tax regime, the Budget 2025 increased the rebate limit, making marginal relief available for incomes just above ₹12 lakh. 

• The maximum surcharge under this scheme is 25%. Individuals who are subject to a surcharge can claim marginal relief.

What is Surcharge on Income Tax?

Surcharge on income tax is an additional charge imposed on individuals or entities with higher income levels. It is a percentage of the income tax payable and is levied based on income brackets. In 2025, the surcharge rate for individuals with income above ₹50 lakh ranges from 10% to 25%, depending on their income. The surcharge aims to increase the tax burden on the wealthier section of society. It is calculated after applying the base income tax, and it enhances the total tax liability.

Different Surcharge Rates for High-Income Taxpayers in India in FY 2025-26

Marginal Relief on Surcharge for Individuals

The following table explains the calculation of marginal relief on surcharge for high income individuals under the New Tax Regime for FY 2025-26:

Key Notes:

• So, Taxpayer’s surcharge is calculated based on their income, with the marginal relief ensuring their total tax doesn’t exceed what it would have been just below the surcharge threshold.

• Same marginal relief principle applies in old tax regime to keep the tax liability from crossing the limit set by the income slab.

Marginal Relief on Surcharge for Companies (Income > ₹1 Crore but ≤ ₹10 Crore)

Explanation:

• Domestic Company (Income ₹1.05 Crore):

  • Tax Payable (without surcharge): ₹31,20,000.

  • Surcharge (7%): ₹2,14,400.

  • Excess Income: ₹5,00,000.

  • No Marginal Relief: Since the excess tax (₹2,14,400) is greater than the excess income (₹5,00,000), no relief is provided.

• Foreign Company (Income ₹1.05 Crore):

  • Tax Payable (without surcharge): ₹31,20,000.

  • Surcharge (2%): ₹64,400.

  • Excess Income: ₹5,00,000.

  • No Marginal Relief: As the excess tax (₹64,400) is lower than the excess income (₹5,00,000), no relief is provided.

Marginal Relief on Surcharge for Firms/ LLP/ Local Authorities (Income > ₹1 Crore)

Explanation:

• Firm's Total Income: ₹1.01 Crore (Exceeds ₹1 Crore by ₹1,00,000).

• Tax Payable on ₹1.01 Crore: Includes surcharge of 12%, leading to a higher tax liability of ₹32,24,000.

• Tax Payable on ₹1 Crore: ₹31,20,000 (no surcharge).

• Excess Tax: The extra ₹1,00,000 income leads to an additional tax of ₹1,04,000.

• Marginal Relief: The firm receives relief of ₹4,000 (difference between excess tax and excess income).

This ensures that the firm’s total tax liability of ₹1.01 Crore doesn’t exceed what it would have been on ₹1 Crore by more than the extra ₹1,00,000.

Conclusion

Marginal Relief in Income Tax is a helpful provision for taxpayers who are on the verge of crossing a tax bracket due to a small income increase. It ensures that the additional income doesn’t push taxpayers into a higher bracket without offering relief. This prevents a sharp hike in tax liabilities. The marginal relief continues to benefit individuals, especially middle-income earners, by offering a fairer tax structure.