Marginal Relief: How it Benefits Small Taxpayers in New Income Tax Regime

Introduction: The Finance 2023 introduced changes to the income tax slabs in the new tax regime, offering a tax rebate of ₹ 25,000 to individual taxpayers whose taxable income is up to ₹ 7 lakh. However, a small increase in income above ₹ 7 lakh can lead to higher tax liability. To address this, marginal relief has been introduced. This article explores marginal relief in the new tax regime and how it benefits small taxpayers.

Under the new tax regime, if an individual’s taxable income exceeds ₹ 7 lakh by just ₹ 10, they lose the rebate of ₹ 25,000 under Section 87A. Their entire taxable income will be taxed at the applicable slab rates, resulting in higher tax liability. This creates a paradoxical scenario where a small increase in income leads to higher tax payments.

To mitigate this, the finance ministry introduced marginal relief, providing relief for taxpayers. Marginal relief ensures that the tax payable does not exceed the income that exceeds ₹ 7 lakh, providing relief for the excess amount of tax.

Consider this example: Mr. A is a salaried employee employed with M/s Alpha Ltd, drawing an annual salary of ₹ 750,010 in FY 2023-24. So, his taxable income, after opting for the new regime and claiming the standard deduction of ₹ 50,000, will come to ₹ 700,010.

Now, since the taxable income exceeds the threshold rebate limit, just by ₹ 10 only but Mr. A will not be able to avail the rebate of ₹ 25,000 under Section 87A, and his entire taxable income of ₹ 700,010 will be taxed at the applicable slab rates under new tax regime. The income tax liability (excl. Health Cess) of Mr. A, in this case, will come out at ₹ 25,000. Thus, just ₹ 10 of additional income in excess of ₹ 7 lakh, compels Mr. A to pay ₹ 25,000 as income tax (excl. Health Cess).

This situation creates a paradoxical scenario where even a small increase in income above ₹ 7 lakh can result in a higher tax liability than the additional income earned.

To address this, the finance ministry has introduced marginal relief (by inserting a new proviso to Section 87A) in the new tax regime for individuals, Hindu Undivided Families (HUFs), Association of Persons (AOPs), and Body of Individuals (BOIs) with taxable income ranging from ₹ 700,005 to ₹ 727,770 lakh in FY 2023-24 and onwards.

How marginal relief will benefit small taxpayers?

Marginal relief ensures that the tax payable does not exceed the income that exceeds ₹ 7 lakh. If the tax computed on the income under the new regime exceeds even the additional income over ₹ 7 lakh, the taxpayer will be eligible for relief for the excess amount of tax.

Here are two examples to illustrate how marginal relief benefits small taxpayers:

Example 1: Mr. A’s taxable income under the new tax regime for FY 2023-24 is ₹ 7,00,010. The income tax (excluding cess) under the new regime for the year would be ₹ 25,001, but the additional income is only ₹ 10. As per the amendment, Mr. A will be eligible for a marginal tax relief of ₹ 24,991 (₹ 25,001 minus ₹ 10). Mr. A will end up paying a tax of ₹ 10 (excluding cess) with this marginal tax relief, resulting in a tax saving of ₹ 24,991.

Example 2: Suppose an individual earns a salary income of ₹ 7,70,000 in the FY 2023-24, and after claiming the standard deduction of ₹ 50,000, their taxable income in the new regime is ₹ 7,20,000 (7,70,000 – 50,000). Here the taxable income increases by ₹ 20,000, and the computed tax on this amount exceeds the additional income over ₹ 7 lakh increases by ₹ 27,000. In such a scenario, the taxpayer can avail relief for the excess amount of tax. The total tax payable (excluding health cess) on the income of ₹ 7,20,000 is ₹ 27,000. Hence, as per the amendment, the individual can avail a marginal relief of ₹ 7,000 (₹ 27,000 minus ₹ 20,000).

The marginal relief is available from April 1, 2023, (FY 2023-24) to taxpayers opting for the new tax regime u/s 115BAC(1A).

This move is a push for the taxpayers to switch to a new tax regime where no exemption/deduction on investments are provided.

However, if a small taxpayer is planning to opt for the old tax regime in FY 2023-24, starting from April 1, 2023, then he/she is not eligible to avail the benefit of marginal relief.

Conclusion: Marginal relief in the new income tax regime benefits small taxpayers by ensuring that the tax payable does not exceed the income that exceeds ₹ 7 lakh. It provides relief for the excess tax amount, resulting from even a small increase in income. This move encourages taxpayers to opt for the new tax regime, where no exemptions or deductions on investments are provided. However, those planning to opt for the old tax regime are not eligible for marginal relief.

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(The author is a practicing Chartered Accountant based in New Delhi. Any comments and/or suggestions concerning this article may be sent to ca.mujeeb@gmail.com / (WhatsApp) + 91 9911400178)