International Tax Panorama

Finance Minister Nirmala Sitharaman announced major income tax relief in Budget 2025, placing more money in the hands of taxpayers and bringing changes to how they calculate their dues.

One of the key highlights is that individuals earning up to Rs 12 lakh will not have to pay any income tax under the new tax regime. However, this change has also led to some confusion, particularly regarding the terms ‘rebate’ and ‘marginal relief.’

With the introduction of new tax slabs, the Income Tax department has addressed concerns through explanations.

While the rebate ensures that those earning up to Rs 12 lakh have no tax liability, marginal relief helps taxpayers who earn slightly above this limit so that they do not end up paying much higher taxes than those below the threshold.

First let’s understand what is tax rebate

First let’s understand rebate. Under Section 87A of the Indian Income Tax Act, provision is made to give rebate to those tax payers whose annual taxable income is less than a certain limit. Till now this limit was Rs 7 lakh, but in today’s budget speech, Nirmala Sitharaman has increased its limit to Rs 12 lakh in the new tax regime.

Here it is just necessary to note that this rebate will be available only to individual income tax payers, no company or firm gets this rebate. Along with this, if the total income exceeds the limit of 87A, then the rebate will not be applicable. By now you have understood that according to the budget announcement, this limit will be Rs 12 lakh from the next financial year. That is, the maximum tax rebate limit for an individual income tax payer is Rs 60 thousand.

What is marginal tax relief?

Marginal relief is a benefit given to individuals earning just over Rs 12 lakh. It ensures that the extra tax payable is not more than the additional income earned beyond the rebate limit. This prevents a situation where a small increase in income leads to a sharp jump in tax liability.

Marginal relief is applicable only to individuals earning slightly above Rs 12 lakh. The maximum rebate available under the new tax regime is Rs 60,000. However, marginal relief applies only to incomes up to approximately Rs 12.75 lakh. Beyond this amount, regular tax slabs will apply, and no additional relief will be available.

What if I earn more than 12 lakhs (as non-salaried individual)?

What will happen to those whose annual income is a little more than 12 lakhs and a little less than 13 lakhs. This is where the role of marginal relief begins. Let’s assume that someone’s annual income is 12 lakh 10 thousand rupees.

Before understanding marginal relief, let us try to understand how much tax is being levied on that person. There will be no tax on the first 4 lakh rupees, the next 4 lakh rupees i.e. from 4 lakh 1 rupee to 8 lakh will be 20 thousand rupees at the rate of 5%, from 8 lakh 1 rupee to 12 lakh will be 40,000 rupees at the rate of 10% and then on the remaining 10 thousand rupees, a tax of 1500 rupees will be levied. In this way, a total tax of Rs 61,500 will be levied on the income of 12 lakh 10 thousand rupees. In such a situation, anyone may regret that the income increased by Rs 10,000 and the tax liability became Rs 61,500 more. Such taxpayers have been given relief in the new tax regime under section 115BAC (1A). Under this system, a person with an income of Rs 12 lakh 10 thousand will have to pay tax of only Rs 10,000 and not Rs 61,500.

How to calculate marginal relief

Let us understand from the above example. The total tax liability of a person with an income of 12 lakh 10 thousand is Rs 61,500. The calculation of how much marginal relief should be given to this person will be done by subtracting his income above ₹12,10,000 i.e. ₹10,000 from the total tax liability which is ₹61,500 in this case. This person will get marginal relief of ₹51,500 and he will have to pay a total tax of only 10 thousand rupees. If the calculation is done in this way, then relief of Rs 500 will be given on an income of Rs 12 lakh 70,000 and no relief will be given if the income is 12.75 lakh or more.