Marginal Relief Explained: Why Tax Suddenly Jumps When Income Exceeds Rs. 12.75 Lakh

Summary

Many taxpayers are confused—and often shocked—when their taxable income exceeds Rs.12.75 lakh by even a small amount and suddenly results in a disproportionately high tax outgo. This confusion stems from the interaction between the rebate under section 87A and the concept of marginal relief under the Income-tax Act, 1961. While marginal relief exists to soften tax jumps at slab thresholds, it does not apply to loss of rebate. This article explains why the tax increases sharply beyond Rs.12.75 lakh, how the calculation actually works, and what taxpayers should practically keep in mind.

Background

With the increasing adoption of the new tax regime under section 115BAC, a large number of salaried and individual taxpayers are now relying on the rebate under section 87A to eliminate their entire tax liability.

For Assessment Year 2025–26, a resident individual opting for the new regime effectively pays zero tax if:

• Total income does not exceed Rs.12.75 lakh, and
• This includes the benefit of standard deduction (Rs.75,000 for salaried taxpayers).

The problem arises when income exceeds Rs.12.75 lakh even by Rs.1. At that point, the entire rebate is lost, and tax becomes payable on the full taxable income, not merely on the excess amount.

Relevant Provisions Explained

Section 87A – Rebate for Resident Individuals

• Section 87A provides a rebate from tax, not a deduction from income.
• Under the new tax regime, if total income does not exceed the prescribed limit (Rs.12.75 lakh), the rebate equals the entire tax payable, making tax liability zero.
• Once the income exceeds the threshold, no rebate is available at all.

In simple terms, section 87A works on an “all-or-nothing” basis.

Section 115BAC – New Tax Regime Slabs (Individual)

Under the new regime, tax is calculated slab-wise as follows (illustrative):

Tax is computed normally first, then rebate is applied if eligible.

Marginal Relief – What It Really Means

Marginal relief is a principle used where:

The additional tax payable should not exceed the additional income earned.

However, marginal relief is expressly provided only in specific situations, such as:

• Surcharge thresholds, and
• Certain special rate situations.

There is no provision in the Act granting marginal relief for loss of rebate under section 87A.

Why Tax Jumps Sharply Beyond Rs.12.75 Lakh

Let us understand this with a simplified example:

Case 1: Income = Rs.12,75,000

• Tax calculated as per slabs: approx. Rs.54,600
• Rebate under section 87A: Rs.54,600
• Net tax payable: Rs.0

Case 2: Income = Rs.12,75,001

• Tax calculated: approx. Rs.54,600 + tax on Rs.1
• Rebate: Not available
• Net tax payable: approx. Rs.54,600 + cess

The extra income of Rs.1 results in a tax liability of over Rs.56,000 (including cess).

This is not a computation error, nor a system glitch—it is the direct legal effect of section 87A.

Key Case Principles (Conceptual, Not Case Names)

• A rebate is a post-tax relief, not an income-based deduction.
• Courts have consistently recognised that hard thresholds in tax law can lead to sharp outcomes.
• Equity or fairness arguments cannot override clear statutory language.
• Marginal relief applies only where specifically legislated, not by implication.

Practical Implications for Taxpayers

1. Salary Structuring Matters
   Even small additional income (bonus, incentives, interest) can push income beyond Rs.12.75 lakh and trigger full tax.

2. Advance Tax Planning Is Critical
   Taxpayers should estimate income well before March to avoid accidental breach of the rebate limit.

3. Investment Timing Can Help
   Certain permissible deductions (where allowed) or deferral of income may keep income within the threshold.

4. No Relief Through Return Filing
   The Income-tax Return utility correctly computes tax—there is no scope to claim marginal relief manually.

5. Litigation Risk Is High
   Challenging this issue legally is difficult due to the clear wording of section 87A.

Common Misconceptions Clarified

• Rs. “Tax should apply only on the excess over Rs.12.75 lakh”
  Rs. Incorrect. Rebate is withdrawn entirely.

• Rs. “Marginal relief should apply automatically”
  Rs. No such provision exists for rebate loss.

• Rs. “This is a software or CPC mistake”
  Rs. The computation follows the law exactly.

Checklist for Taxpayers Near the Rs.12.75 Lakh Limit

•  Estimate total income including interest and bonuses
•  Check whether opting for new regime is still optimal
•  Track Form 26AS and AIS entries carefully
•  Avoid small unplanned income additions near year-end
•  Consult before accepting taxable perquisites or incentives