Finance Minister Nirmala Sitharaman announced in her Budget speech that individuals earning up to Rs 12 lakh per annum will not have to pay any tax after adjusting the Standard Deduction of Rs 75,000 and the revised tax rebate of Rs 60,000. Earlier, the tax rebate of Rs 25,000 was applicable on annual income up to Rs 7 lakh, but now it will apply to income up to Rs 12 lakh.
Tax Calculation for Rs 12.75 lakh annual income
With these changes, individuals with an annual income of up to Rs 12.75 lakh will effectively pay no tax. Here’s how:
Standard Deduction: Rs 75,000
Taxable income after deduction: Rs 12,75,000 – Rs 75,000 = Rs 12,00,000
New Tax Regime slabs:
Income up to Rs 4 lakh: 0% tax → Rs 0
Rs 4 lakh – Rs 8 lakh: 5% tax → Rs 20,000
Rs 8 lakh – Rs 12 lakh: 10% tax → Rs 40,000
Total tax liability before rebate: Rs 20,000 + Rs 40,000 = Rs 60,000
Tax Rebate under Section 87A: Rs 60,000
Final tax liability: Rs 60,000 – Rs 60,000 = NIL
Since there is no tax liability, the take-home salary remains Rs 12.75 lakh per annum.
Tax calculation for Rs 13 lakh annual income
Now, let’s calculate tax for an individual earning Rs 13 lakh per annum under the new tax regime.
Standard Deduction: Rs 75,000
Taxable income after deduction: Rs 13,00,000 – Rs 75,000 = Rs 12,25,000
New Tax Regime slabs:
Income up to Rs 4 lakh: 0% tax → Rs 0
Rs 4 lakh – Rs 8 lakh: 5% tax → Rs 20,000
Rs 8 lakh – Rs 12 lakh: 10% tax → Rs 40,000
Rs 12 lakh – Rs 12.25 lakh: 15% tax → Rs 3,750
Total tax liability before cess: Rs 20,000 + Rs 40,000 + Rs 3,750 = Rs 63,750
Health & Education Cess (4%): Rs 2,550
Total tax liability: Rs 63,750 + Rs 2,550 = Rs 66,300
Net take-home salary:
Rs 13,00,000 – Rs 66,300 = Rs 12,33,700
At first glance, it appears that individuals earning Rs 12.75 lakh take home Rs 12.75 lakh, while those earning Rs 13 lakh take home only Rs 12.33 lakh, which is lower. To prevent this, marginal relief is applied.
What is marginal relief provision?
Marginal relief ensures that an individual earning slightly above the rebate threshold does not end up with a lower take-home salary than someone below the threshold. It ensures that the extra tax payable does not exceed the additional income earned beyond Rs 12 lakh.
Marginal relief calculation for Rs 13 lakh
Additional income over Rs 12 lakh = Rs 1,00,000
Tax payable without relief = Rs 66,300
Marginal tax liability should not exceed Rs 1,00,000.
To maintain parity, the tax payable is adjusted to Rs 25,000 instead of Rs 66,300.
Thus, net take-home salary = Rs 13,00,000 – Rs 25,000 = Rs 12,75,000, ensuring fairness.
Understand from one more example given in the tax department’s FAQs, how marginal relief is applied:
Marginal relief example for Rs 12.10 lakh
For a taxpayer earning Rs 12,10,000, without relief, the tax would be:
Rs 4 lakh – Rs 8 lakh → 5% tax = Rs 20,000
Rs 8 lakh – Rs 12 lakh → 10% tax = Rs 40,000
Rs 12 lakh – Rs 12.10 lakh → 15% tax = Rs 1,500
Total tax liability before relief: Rs 61,500
However, since a person earning Rs 12 lakh pays 0 tax, marginal relief ensures that the tax payable is limited to the extra income above Rs 12 lakh, i.e., Rs 10,000.
Conclusion
Marginal relief prevents individuals earning slightly above Rs 12 lakh from facing disproportionately high tax liabilities. It ensures a fair transition between tax brackets, avoiding situations where earning a little more results in a significantly lower take-home salary.