New Tax Regime and Marginal Relief Rule Explained
The Income Tax Department has introduced significant changes in the new tax regime, making annual incomes up to ₹12 lakh tax-free. This move is expected to benefit millions of taxpayers while increasing liquidity in the economy. However, an interesting scenario arises when income slightly exceeds ₹12.75 lakh, as it initially appears that an individual will have to pay ₹62,556 in taxes on just ₹1,000 extra income. To address this, the government has implemented a Marginal Relief Rule, ensuring fairness in taxation.
New Tax Exemption Limit Increased to ₹12 Lakh
In the Budget 2025, Finance Minister Nirmala Sitharaman announced that income up to ₹12 lakh will be tax-free under the New Tax Regime. Earlier, income up to ₹7 lakh was exempt under Section 87A, with a rebate of ₹25,000. Now, this rebate has been increased to ₹60,000, making income up to ₹12 lakh completely tax-free.
Additionally, salaried individuals will continue to benefit from the standard deduction of ₹75,000, effectively making income up to ₹12.75 lakh tax-free.
New Tax Slabs for 2025
| Income Range (₹) | Tax Rate (%) |
|---|---|
| 0 – 4 lakh | 0% |
| 4 – 8 lakh | 5% |
| 8 – 12 lakh | 10% |
| 12 – 16 lakh | 15% |
| 16 – 20 lakh | 20% |
| 20 – 24 lakh | 25% |
| Above 24 lakh | 30% |
Under the new structure, income exceeding ₹4 lakh is taxed, but rebate under Section 87A ensures that income up to ₹12 lakh remains tax-free.
Why ₹12.76 Lakh Income Faces Only ₹1,000 Tax?
If a person’s income is ₹12.75 lakh, no tax is payable due to the combined benefits of the ₹60,000 rebate and ₹75,000 standard deduction.
However, if the income increases by just ₹1,000 to ₹12.76 lakh, it falls under taxation, and the total tax liability jumps to ₹62,556, which seems unfair.
This is where the Marginal Relief Rule comes into play.
What is Marginal Relief?
The Marginal Relief Rule prevents disproportionate taxation on slight income increases. It states that when the tax liability due to a small increase in income is excessively high, the individual will pay whichever amount is lower between:
- The tax calculated under the slab
- The incremental income amount
Example of Marginal Relief in Action
- Case 1: Income = ₹12.76 lakh
- Normal tax as per slab = ₹62,556
- Incremental income = ₹1,000
- Tax payable (as per Marginal Relief Rule) = ₹1,000
- Case 2: Income = ₹13 lakh
- Normal tax as per slab = ₹25,000
- Incremental income = ₹25,000
- Tax payable = ₹25,000
- Case 3: Income = ₹13.25 lakh
- Normal tax as per slab = ₹50,000
- Incremental income = ₹50,000
- Tax payable = ₹50,000
The marginal relief is available up to a certain income limit, ensuring that taxpayers do not face an extreme tax jump due to a minor income increase. Once the incremental tax liability equals the income increase, full taxation applies.
Conclusion
The New Tax Regime 2025 brings huge tax relief for individuals earning up to ₹12.75 lakh, making taxation more taxpayer-friendly. However, for those slightly exceeding this threshold, the Marginal Relief Rule ensures they are not unfairly taxed. This move is set to reduce the financial burden on the middle class while increasing disposable income in the economy.
Would you like further clarifications or additional details?
