Introduction
The Union Budget 2025-26 has brought good news for taxpayers with its increase in the income tax exemption limit under the New Tax Regime to ₹12 lakh. Individuals earning up to ₹12,00,000 annually are now exempt from paying income tax. However, a common question arises for those earning slightly above this limit: What happens if your income exceeds ₹12 lakh?
While it may seem that a small increase in income results in a large tax liability, this is not the case. Marginal Relief has been introduced to ensure that individuals with income slightly exceeding ₹12 lakh are not burdened with disproportionately high taxes.
This article explains:
- The new income tax exemption limit for FY 2025-26.
- The tax slabs under the New Tax Regime.
- How Marginal Relief works with examples.
- Eligibility criteria for Marginal Relief.
- Step-by-step guidance on tax calculation with Marginal Relief.
New Income Tax Limit Under Budget 2025-26
The Union Budget 2025-26 has significantly benefited taxpayers by increasing the income tax exemption limit under the New Tax Regime to ₹12 lakh. This means that individuals with a taxable income of ₹12 lakh or less will not be required to pay income tax.
Here’s a quick overview of the new income tax slabs for FY 2025-26:
| Income Range | Tax Rate |
| ₹0 – ₹4,00,000 | 0% |
| ₹4,00,001 – ₹8,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% |
| ₹12,00,001 and above | 15% |
Why is Marginal Relief Needed?
A key concern arises when taxpayers earn slightly more than ₹12 lakh. For instance, a person earning ₹11,90,000 pays zero tax, but someone earning ₹12,10,000 could face a tax liability of ₹61,500. This sudden increase in tax burden seems unfair, which is why Marginal Relief is necessary.
Marginal Relief ensures that individuals earning just above ₹12 lakh do not face an immediate, disproportionate increase in tax liabilities. Instead, the tax burden is reduced by accounting for the small excess income.
How Marginal Relief Works
Marginal Relief applies when an individual’s taxable income is between ₹12,00,000 and ₹12,75,000. If your income exceeds ₹12 lakh by a small amount (up to ₹75,000), you will not pay tax on the entire income, but only on the amount that exceeds ₹12 lakh after applying the relief.
Example 1: Income = ₹11,90,000
- Tax Liability: ₹0
Since the income is below ₹12 lakh, no tax is payable.
Example 2: Income = ₹12,10,000
- Tax Calculation Without Marginal Relief:
- ₹0 – ₹4,00,000 → 0% tax = ₹0
- ₹4,00,001 – ₹8,00,000 → 5% tax = ₹20,000
- ₹8,00,001 – ₹12,00,000 → 10% tax = ₹40,000
- ₹12,00,001 – ₹12,10,000 → 15% tax = ₹1,500
- Total Tax Before Marginal Relief = ₹61,500
- Applying Marginal Relief:
- Excess Income: ₹12,10,000 – ₹12,00,000 = ₹10,000
- Marginal Relief: ₹61,500 – ₹10,000 = ₹51,500
- Final Tax Payable: ₹61,500 – ₹51,500 = ₹10,000
In this scenario, Marginal Relief reduces the final tax payable from ₹61,500 to ₹10,000, ensuring fairness for individuals whose income slightly exceeds ₹12 lakh.
Example 3: Income = ₹12,50,000
- Tax Calculation Without Marginal Relief:
- Total Tax Before Marginal Relief = ₹67,500
- Applying Marginal Relief:
- Excess Income: ₹12,50,000 – ₹12,00,000 = ₹50,000
- Marginal Relief: ₹67,500 – ₹50,000 = ₹17,500
- Final Tax Payable: ₹67,500 – ₹17,500 = ₹50,000
Example 4: Income = ₹12,80,000
- Tax Calculation Without Marginal Relief:
- Total Tax Before Marginal Relief = ₹72,000
- No Marginal Relief applies as income exceeds ₹12,75,000.
- Final Tax Payable = ₹72,000
Who Can Benefit from Marginal Relief?
Individuals who fall within the income range of ₹12,00,000 to ₹12,75,000 can benefit from Marginal Relief. The provision is designed to help individuals who earn slightly more than ₹12 lakh avoid sudden, unfairly high tax liabilities.
Key Eligibility Criteria:
- Your taxable income is between ₹12,00,000 and ₹12,75,000.
- You are subject to the New Tax Regime.
- Marginal Relief applies only to incomes slightly above ₹12 lakh and is unavailable for those earning more than ₹12,75,000.
Conclusion
The Union Budget 2025-26 has introduced important tax reliefs for individuals earning up to ₹12 lakh, with a special focus on ensuring fairness for those earning slightly above this threshold. Thanks to Marginal Relief, individuals earning between ₹12,00,000 and ₹12,75,000 can avoid disproportionate tax increases.
By understanding how Marginal Relief works, you can effectively plan your taxes and optimize your liabilities under the New Tax Regime.