Introduction
The introduction of marginal relief under Section 87A for the new tax regime has brought significant changes to tax calculations for FY 2023-24 and AY 2024-25. This post provides a comprehensive analysis of marginal relief, including its application, implications, and examples to illustrate how it affects tax liabilities.
Marginal Relief: Overview
Marginal Relief is designed to provide tax relief to taxpayers whose income exceeds the prescribed rebate limit. Under the new tax regime, this relief ensures that taxpayers pay only a nominal tax on the income exceeding ₹7,00,000, preventing a disproportionate increase in tax liability due to a slight increase in income.
Section 87A: Tax Rebate
Section 87A provides a tax rebate to taxpayers with total taxable income below a specified threshold. The key points are:
- Old Tax Regime: Rebate up to ₹12,500 if taxable income does not exceed ₹5,00,000.
- New Tax Regime (FY 2023-24 & AY 2024-25): Rebate up to ₹25,000 if taxable income does not exceed ₹7,00,000.
Marginal Relief Calculation for New Tax Regime
Under the new tax regime, marginal relief is available to ensure that the tax liability on income slightly exceeding ₹7,00,000 is minimized. The relief is calculated as follows:
- Marginal Relief Amount: Tax payable will be reduced by the excess income over ₹7,00,000.
Formula for Marginal Relief:
Example Calculation:
Example 1: Taxable Income = ₹7,70,000
- Gross Salary: ₹7,70,000
- Standard Deduction: ₹50,000
- Total Taxable Income: ₹7,70,000 - ₹50,000 = ₹7,20,000
- Income Exceeding ₹7,00,000: ₹7,20,000 - ₹7,00,000 = ₹20,000
- Tax Computation:
- Up to ₹3,00,000: Nil
- ₹3,00,001 to ₹7,00,000: 5% of ₹4,00,000 = ₹20,000
- ₹7,00,001 to ₹7,20,000: 10% of ₹20,000 = ₹2,000
- Total Tax Before Marginal Relief: ₹20,000 + ₹2,000 = ₹22,000
- Marginal Relief: ₹22,000 - ₹20,000 = ₹2,000
- Tax Payable After Marginal Relief: ₹22,000 - ₹2,000 = ₹20,000
Example 2: Taxable Income = ₹8,00,000
- Gross Salary: ₹8,00,000
- Standard Deduction: ₹50,000
- Total Taxable Income: ₹8,00,000 - ₹50,000 = ₹7,50,000
- Income Exceeding ₹7,00,000: ₹7,50,000 - ₹7,00,000 = ₹50,000
- Tax Computation:
- Up to ₹3,00,000: Nil
- ₹3,00,001 to ₹7,00,000: 5% of ₹4,00,000 = ₹20,000
- ₹7,00,001 to ₹7,50,000: 10% of ₹50,000 = ₹5,000
- Total Tax Before Marginal Relief: ₹20,000 + ₹5,000 = ₹25,000
- Marginal Relief Not Applicable: The tax payable is less than the excess income, so no marginal relief is granted.
Health and Education Cess & Surcharge
- Health and Education Cess: 4% of Income Tax + Surcharge
- Surcharge Rates for New Tax Regime:
| Total Income (₹) | Old Tax Regime | New Tax Regime |
|---|---|---|
| Up to 50,00,000 | Nil | Nil |
| 50,00,001 to 1,00,00,000 | 10% | 10% |
| 1,00,00,001 to 2,00,00,000 | 15% | 15% |
| 2,00,00,001 to 5,00,00,000 | 25% | 25% |
| Above 5,00,00,000 | 37% | 25% |
Note: Enhanced surcharge rates do not apply to income under sections 111A, 112, 112A, and Dividend Income. For such incomes, the maximum surcharge rate is 15%.
Marginal Relief for Surcharge
Marginal Relief for Surcharge ensures that the additional tax burden due to surcharge does not exceed the excess income:
| Net Income Range (₹) | Marginal Relief Explanation |
|---|---|
| 50,00,000 to 1,00,00,000 | Tax and surcharge shall not exceed the total tax payable on ₹50,00,000 by more than the excess income. |
| 1,00,00,000 to 2,00,00,000 | Tax and surcharge shall not exceed the total tax payable on ₹1,00,00,000 by more than the excess income. |
| 2,00,00,000 to 5,00,00,000 | Tax and surcharge shall not exceed the total tax payable on ₹2,00,00,000 by more than the excess income. |
| Above 5,00,00,000 | Tax and surcharge shall not exceed the total tax payable on ₹5,00,00,000 by more than the excess income. |
Conclusion
The introduction of marginal relief under Section 87A for the new tax regime provides a valuable benefit to taxpayers whose income slightly exceeds the ₹7,00,000 limit. By applying marginal relief, taxpayers can avoid a disproportionate increase in tax liability due to modest increases in income. It is essential for taxpayers to understand how marginal relief and surcharge work to optimize their tax planning strategies effectively.
Taxpayers should review their taxable income and calculate their potential marginal relief to ensure they benefit from the available rebates and avoid unnecessary tax burdens.
