Applicability of Marginal relief under new regime as well as old tax regime

“Explore the applicability of Marginal Relief in both old and new tax regimes, designed to ease the tax burden on individuals with incomes slightly above certain thresholds. Gain insights through examples and understand its impact on tax calculations. Stay informed about tax-saving opportunities.”

Marginal relief is a concept in income tax act which helps in reducing the burden of taxpayers whose income is marginally above a certain threshold.

This concept is applicable in relation to surcharge (for both old and new regime) and the rebate/s 87A (for new regime only).

Let’s understand its implications with the help of an example:

Suppose Mr. A has a total income of ₹ 50,90,000 which is marginally above the surcharge limit.

The tax calculation would be as follows: –  (before H&E cess)

See, in above e.g., the income of Mr. A exceeds only by ₹ 90,000 but the surcharge got applicable and turned the tax amount to be ₹ 14,73,450.

Therefore, there is an increase in income of only ₹ 90,000 but the tax increased by ₹ 1,60,950.

So, the difference between the increased tax and the increased income will be taken as marginal relief which comes to ₹ 70,950.

Due to the applicability of marginal relief in this example, Mr. A is able to save the taxes by ₹63,000.

However, the marginal relief was not available under the old regime w.r.t. to rebate u/s 87A which is now provided to the taxpayers under the NEW REGIME ONLY to the taxpayers by the amendment in the Finance Bill, 2023.

Let’s see how it goes under new regime.

The government has been offering great benefits to those who are opting for new regime, one of them is the introduction of marginal relief in income tax act for those opting for the new regime.

Earlier in the Finance Bill, 2023, they made applicable the concept of Section 87A to the new regime i.e., up to the total income of ₹7,00,000, no tax shall be payable. This again was causing the same anomaly as it was in the old regime, therefore the government amended it while passing the Finance Act, 2023 and introduced the concept of marginal relief for the rebate u/s 87A.

In the above table, we can see that had marginal relief not been there for the taxpayers then they would end up paying a higher tax if it would not have been introduced in the new regime.

The taxpayers whose Total Income is upto ₹ 7,27,770 can be benefitted utmost with the concept of marginal relief ( as seen in scenario IV). The marginal relief is basically the difference between the tax amount and increase in income over ₹ 7,00,000. For instance, in scenario II, tax is ₹ 26,500 (calculated as per new slab rates) and the increased income is ₹15,000, so the marginal relief available would be ₹ 11,500.

It can be concluded that those who have total income in range of ₹ 7,00,000- ₹ 7,27,770 can be benefitted with the concept of Marginal Relief. Further, the government has done a great job in introducing the concept of marginal relief in the new regime to fix the anomaly. However, the government should also take due care in fixing the same in old regime also since they face the exact issue which was persisting in the new regime.

Note: I have not considered health and education cess and the effect of any special incomes in above tax calculations.