Marginal Relief Under the New Tax Regime: How It Saves Tax Just Above ₹12 Lakh

The Cliff-Edge Problem That Marginal Relief Fixes

The Section 87A rebate under the new tax regime makes income up to ₹12 lakh tax-free for resident individuals (the rebate is capped so that tax liability becomes nil up to this threshold). But rebates work on an all-or-nothing basis at the boundary - if your total income is even ₹1 more than the eligible limit, you technically lose the entire rebate, not just the rebate on the excess amount.

Without a corrective mechanism, someone earning ₹12,00,000 would pay zero tax, while someone earning ₹12,00,100 could suddenly be liable for tax computed on the full ₹12,00,100 under the slab rates - which could easily run into tens of thousands of rupees. Earning ₹100 more would cost you far more than ₹100 in tax. This is the classic "cliff-edge" or notch problem in tax design.

How Marginal Relief Is Calculated

The marginal relief computation compares two numbers and caps your tax liability at the lower of the two paths:

• Step 1: Compute the normal tax liability on your total income as per the new regime slab rates (before any rebate).
• Step 2: Compute the amount by which your total income exceeds the rebate threshold (₹12,00,000).
• Step 3: If the tax computed in Step 1 is higher than the excess income computed in Step 2, your tax liability is reduced (relief is granted) so that it equals exactly the excess income amount.
• Step 4: Health & Education Cess (4%) is then added on top of this reduced tax amount.

Worked Example

Without marginal relief, this taxpayer would have paid roughly ₹61,500 plus cess on an income that's only ₹10,000 above the rebate threshold. With marginal relief, the tax is capped so it never exceeds the ₹10,000 of extra income (before cess).

At What Income Level Does Marginal Relief Stop Applying?

Marginal relief tapers off as income rises, because the normal tax liability grows faster than the income above ₹12,00,000. There's a crossover point beyond which the actual slab-rate tax becomes lower than the excess-income amount, and at that point marginal relief no longer reduces your tax - you simply pay tax as per the normal slab computation. Beyond this crossover income level (which depends on the exact slab structure for the relevant financial year), the rebate and marginal relief provisions cease to have any effect, and tax is computed purely on slab rates.

Does Marginal Relief Apply to the Old Tax Regime Too?

The old tax regime has its own Section 87A rebate (for total income up to ₹5 lakh, with a much smaller rebate amount), and a similar marginal relief concept applies there as well for taxpayers whose income is just above ₹5 lakh. However, since most taxpayers with income well above ₹5 lakh opt for the new regime anyway (where the rebate threshold is far higher), marginal relief is most commonly discussed and relevant in the context of the new regime's ₹12 lakh threshold.

Why This Matters for Salary Negotiations and Bonus Timing

If your income is expected to land close to ₹12,00,000 - for example, due to a bonus, arrears, or a salary hike effective partway through the year - it's worth being aware that crossing the threshold by a small amount won't result in a disproportionate tax hit, thanks to marginal relief. This removes the (incorrect) incentive some taxpayers feel to artificially defer income to stay just under ₹12 lakh, since the relief provision already smooths out the transition.