Why Has My Income Tax Increased So Much Even Though My Income Increased Only Slightly above 12 lakh?
Summary: Under the new tax regime for FY 2025-26 (AY 2026-27), a resident individual with taxable income not exceeding Rs. 12,00,000 is eligible for a rebate under Section 87A, reducing the tax liability to zero subject to the prescribed conditions. If taxable income exceeds Rs. 12,00,000, marginal relief acts as a transition mechanism to ensure that the additional income tax does not exceed the amount by which taxable income exceeds Rs. 12 lakh. The relief is calculated by comparing the normal income tax before cess with the excess income over Rs. 12,00,000, and where applicable, the relief equals the difference between these amounts. After allowing marginal relief, Health and Education Cess is computed on the reduced tax. Illustratively, where taxable income is Rs. 12,19,740, tax before cess is restricted to Rs. 19,740, while for taxable income of Rs. 12,44,064, tax before cess is restricted to Rs. 44,064. As income increases further, the benefit of marginal relief gradually reduces and eventually becomes zero, after which tax is payable according to the regular slab rates. The content clarifies that this gradual transition applies even though the Section 87A rebate is available only up to Rs. 12 lakh.
Introduction: One of the most common questions taxpayers are asking this year is: “My taxable income increased by only ₹20,000 or ₹30,000, so why has my income tax increased by almost the same amount?” At first glance, such a sharp increase in tax despite only a small rise in income may appear surprising or even suggest that something is wrong with the calculation. However, the reason lies in the working of marginal relief under the new tax regime, which affects the tax payable when total income slightly exceeds ₹12 lakh. To understand why a modest increase in income can result in a disproportionately high increase in tax liability, let us examine the concept through a simple example.
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What is the rebate under Section 87A?
Under the new tax regime for FY 2025-26 (AY 2026-27), a resident individual whose taxable income does not exceed ₹12,00,000 is eligible for a rebate under Section 87A. This means that although tax is calculated as per the slab rates, the rebate reduces the tax liability to zero (subject to the prescribed conditions).
But what happens if your income is ₹12,00,001?
Without any relief, even crossing the limit by ₹1 could result in a substantial tax liability. To prevent this unfair situation, the Income-tax Act provides marginal relief.
What is marginal relief?
Marginal relief is a transition mechanism. It ensures that if your taxable income exceeds ₹12 lakh by a small amount, your additional tax should not be more than your additional income.
In simple words, the government does not want a person earning ₹12,00,100 to end up paying ₹60,000 or more in tax just because they crossed the threshold by ₹100.
Instead, the tax increases gradually as your income increases.
How is marginal relief calculated?
The calculation is straightforward.
1. Calculate the normal income tax as per the slab rates.
2. Find the amount by which your taxable income exceeds ₹12,00,000.
3. If the normal tax is more than this excess amount, marginal relief is allowed.
4. The relief equals the difference between the normal tax and the excess income.
Mathematically:
Marginal Relief = Income Tax (before cess) − (Taxable Income − ₹12,00,000)
After allowing this relief, your income tax becomes equal to the amount by which your income exceeds ₹12 lakh.
Health and Education Cess is then calculated on the reduced tax.
A practical example
Suppose Mr. A has a taxable income of ₹12,19,740.
His income exceeds ₹12 lakh by ₹19,740.
Although his normal tax as per the slab rates is much higher, he is eligible for marginal relief. As a result, his income tax (before cess) is restricted to ₹19,740. After adding 4% Health and Education Cess, his total tax works out to around ₹20,530.
Now suppose his taxable income increases to ₹12,44,064.
His income above ₹12 lakh is now ₹44,064.
Again, marginal relief applies, but since the excess income has increased, the maximum tax payable also increases. His tax before cess becomes ₹44,064, and after adding cess, the total tax is approximately ₹45,827.
Notice what happened.
His income increased by only ₹24,324, but his tax also increased by almost the same amount.
Many taxpayers assume this is an error. It is not. This is exactly how marginal relief is designed to work.
Does marginal relief continue forever?
No.
As your income increases, the benefit of marginal relief keeps reducing. Eventually, your normal slab-wise tax becomes equal to or lower than the amount allowed after marginal relief. At that stage, the relief becomes zero, and you pay tax according to the regular slab rates.
This is why taxpayers with incomes slightly above ₹12 lakh often notice a steep increase in tax, whereas those with higher incomes no longer receive this benefit.
Common misunderstanding
Many people believe that once their income crosses ₹12 lakh, the entire rebate disappears immediately and they have to pay full tax.
That is not correct.
The rebate under Section 87A is available only up to ₹12 lakh, but marginal relief ensures that the withdrawal of this benefit is gradual rather than abrupt.
Conclusion
If your taxable income is just above ₹12 lakh, don’t be surprised if your tax increases almost in line with the increase in your income. This is not a mistake in the Income Tax Return utility. It is the intended effect of the marginal relief provisions introduced to make the transition from zero tax to normal tax more equitable.
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Before concluding that your tax calculation is incorrect, always check whether marginal relief has been applied correctly. Contact NIRA Associates @ Mob. +918588900433 and Email – csniraassociates@gmail.com for proper understanding of this provision and helping you avoid unnecessary confusion while filing your return.
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