Under the new tax regime, total income up to ₹12 lakh is effectively tax-free thanks to the Section 87A rebate. But what happens if your income is ₹12,10,000 - just ₹10,000 over the limit? Without a safety net, you'd suddenly owe tax on the entire amount, not just the excess. That's exactly the problem marginal relief solves.
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.
The marginal relief computation compares two numbers and caps your tax liability at the lower of the two paths:
| Particulars | Income = ₹12,10,000 |
|---|---|
| Total income | ₹12,10,000 |
| Tax as per normal slab rates (new regime, before cess) | Suppose this works out to roughly ₹61,500 |
| Excess income over ₹12,00,000 threshold | ₹10,000 |
| Tax after marginal relief (capped at excess income) | ₹10,000 (instead of ₹61,500) |
| Add: Health & Education Cess @ 4% | ₹400 |
| Final tax payable | ₹10,400 |
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).
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.
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.
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.