Marginal Relief Under the New Tax Regime: Understanding Why Tax Rises Sharply Just Above Rs. 12 Lakh

Introduction

A question that has been appearing frequently among assessees this filing season goes something like this: "My income went up by just Rs. 25,000 — so why has my tax liability shot up by nearly the same amount?"

This reaction is entirely understandable. At first look, a near-equal rise in tax alongside a modest rise in income does seem disproportionate — even alarming. Some assessees immediately suspect a computational error in the return filing utility. Others assume the new tax regime is penalising them unfairly for earning slightly more.

In reality, neither of these assumptions is correct.

The explanation lies in a specific provision of the Income Tax Act, 1961 known as marginal relief — a transitional mechanism designed to cushion the abrupt jump in tax liability that would otherwise occur the moment an assessee's taxable income crosses Rs. 12,00,000 under the new tax regime for FY 2025-26 (AY 2026-27).

This article unpacks the concept of marginal relief in a structured, practical manner so that assessees — and those advising them — can fully understand what is happening and why.

The Foundation: Rebate Under Section 87A

What the Rebate Provides

Under the new tax regime applicable for FY 2025-26 (AY 2026-27), a resident individual whose total taxable income does not exceed Rs. 12,00,000 qualifies for a rebate under Section 87A of the Income Tax Act, 1961.

The practical effect of this rebate is significant:

  • Tax is first computed on the taxable income as per the applicable slab rates
  • The rebate under Section 87A is then applied
  • The net tax liability is reduced to zero, subject to prescribed conditions

This means that a resident individual earning up to Rs. 12,00,000 in taxable income effectively pays no income tax at all under the new regime — a substantial benefit.

The Cliff Edge Problem

Here is where the complexity begins. The rebate under Section 87A is available only where taxable income does not exceed Rs. 12,00,000. The moment income crosses this threshold — even by a single rupee — the rebate is no longer available.

Without any further provision, an assessee with taxable income of Rs. 12,00,001 would face a situation where:

  • At Rs. 12,00,000 → Tax liability = Zero (rebate applies)
  • At Rs. 12,00,001 → Tax liability = Rs. 60,000+ (full slab-rate tax with no rebate)

Such a sudden and steep jump in tax arising from a difference of just Re. 1 in income would be patently inequitable. The Income Tax Act, 1961 addresses this problem through the marginal relief provision.

Understanding Marginal Relief

What Marginal Relief Is

Marginal relief is best understood as a bridge mechanism. It prevents the tax system from imposing a disproportionate burden on an assessee whose income crosses the Rs. 12,00,000 threshold by a relatively modest amount.

The core principle is straightforward: