Tax Relief for Those Earning Just Over Rs 12 Lakh: Here's How Much You Can Save with Marginal Relief

Understanding the Tax Rebate and Marginal Relief Under the New Tax Regime 2025-26

In the latest budget announcement, a significant change has been introduced to the tax structure that impacts individuals with an income below Rs 12 lakhs. Under the new tax regime, if your income is below Rs 12 lakhs, you are exempt from paying tax. However, it's important to note that this is not an exemption but a tax rebate, which operates differently from an exemption.

What is a Tax Rebate?

A tax rebate can be thought of as a "discount coupon" provided by the government. If your income is below Rs 12 lakhs, the government gives you a discount in the form of a rebate worth Rs 60,000. This effectively reduces your tax liability to zero. However, once your income exceeds Rs 12 lakhs, the rebate disappears, and you become liable to pay tax on your total income, even for a small increase over the Rs 12 lakh mark.

The Concept of Marginal Relief

One of the most significant features introduced with the new tax regime is marginal relief, which prevents a steep tax increase when your income exceeds the Rs 12-lakh threshold. In simple terms, marginal relief ensures that the tax burden does not rise disproportionately when your income crosses a certain limit.

Let’s break this down with an example:

Example: How Marginal Relief Works

Consider the scenario where your income is Rs 12,10,000. Without marginal relief, once you cross the Rs 12 lakh threshold, the rebate disappears, and you are suddenly liable to pay a tax of Rs 61,500. This means that despite only earning an additional Rs 10,000 (from Rs 12 lakhs to Rs 12.1 lakhs), your tax liability increases by Rs 61,500. In this case, you would pay more tax than the increase in your income, which would seem unfair and disproportionate.

Here’s where marginal relief comes into play. The rule for marginal relief states that your tax liability cannot exceed the increase in your income. In this case, since your income has increased by Rs 10,000, your tax liability is limited to that same amount (Rs 10,000). This ensures that you don’t pay more tax than the increase in your income, which is a much fairer structure for taxpayers.

A Deeper Look at the Dead Zone

There exists a tax "dead zone" in this new regime, which is the income range where marginal relief applies. This zone is essentially a bracket where an increase in income causes a significant tax rise, even if the income increase is minimal.

For instance, let’s say your income is Rs 12,50,000 (12.5 lakhs). Without marginal relief, you would pay Rs 67,500 in tax, which seems reasonable given your income. However, due to marginal relief, your tax is reduced to Rs 50,000, the amount by which your income has exceeded Rs 12 lakhs. While this scenario may not seem ideal, it ensures that your tax increase is proportional to the income increase.

This dead zone exists from Rs 12 lakhs to Rs 12.75 lakhs. For anyone earning in this range, the increase in income is entirely offset by the tax, which can be frustrating. Nevertheless, marginal relief at least ensures that you do not lose more than the actual increase in your income to taxes.

With Rs 75,000 standard deduction, Marginal relief è Rs 12.75 lakhs to 13.5 lakhs

Standard Deduction and Its Impact on the Marginal Relief Zone

When we factor in the standard deduction of Rs 75,000 that all employees are entitled to, this shifts the "dead zone" upward. Instead of starting at Rs 12 lakhs, the zone now begins at Rs 12.75 lakhs and goes up to Rs 13.5 lakhs. This slight shift gives taxpayers earning in this range a bit more leeway before they fall into the marginal relief zone.

The principle of marginal relief remains the same, but the income bracket has expanded slightly, providing some relief for those earning above the Rs 12 lakh mark. This adjustment, while helpful, still leaves employees with little room for growth within this zone, as taxes will almost entirely consume the additional income earned.

Saving Tax Through Employer Contributions to NPS

If you find yourself in the marginal relief zone and are concerned about your tax burden, one way to save some money is by leveraging the National Pension Scheme (NPS). Employer contributions to NPS are eligible for tax deductions under the new tax regime as well. Employers can contribute up to 14 per cent of your basic pay to your NPS account, which helps reduce your taxable income and, consequently, your tax liability.

This option provides a potential tax-saving opportunity, particularly for individuals who find themselves in the marginal relief zone, where much of their additional income is being taxed.

Conclusion

In summary, the introduction of the tax rebate and the concept of marginal relief under the new tax regime aims to provide some relief to individuals with income below 12 lakhs. While the tax rebate offers a significant reduction in tax for those earning below this threshold, the marginal relief ensures that individuals do not face a disproportionate increase in taxes when their income exceeds Rs 12 lakhs, especially in the "dead zone" between Rs 12 and Rs 12.75 lakhs.

Though these changes may not be the most ideal for those receiving small increments in this range, they provide some level of fairness in how taxes are applied. Additionally, options like employer contributions to NPS offer ways to save on taxes, even for those within the marginal relief zone.

By understanding how these tax structures work, taxpayers can make informed decisions to optimize their tax liabilities and ensure they are not unfairly burdened by minor income increases.

Disclaimer: The article is for informational purposes only and not investment advice.