New Tax Regime: Big update for taxpayers. At first glance, the new tax regime may seem extremely strict. Many taxpayers fear that if their annual taxable income exceeds the Rs 12 lakh threshold by even just one rupee, they will lose the entire tax rebate under Section 87A and be hit with a hefty tax bill.
If you harbor this same fear, there’s some good news for you. The Income Tax Act has a built-in safeguard to address this situation. This relief provision prevents you from facing a disproportionately large tax burden on your slightly increased income. Let’s understand, simply, whether earning just Rs 1,500 more than Rs 12 lakh will require you to pay the full tax, or whether there’s another option.
How much tax will be levied if you earn Rs 1500 more than Rs 12 lakh?
If your total taxable income for the fiscal year 2025-2026 is ₹1,201,500, exceeding the ₹12 lakh limit for claiming a rebate under Section 87A, you may wonder if you need to pay the full tax of ₹60,225 according to the slab rate after the basic exemption limit of ₹4 lakh. It might feel unjust to be charged such a substantial tax for earning just ₹1,500 extra. Is there a way to avoid this situation?
What is the rule of Section 87A about?
In the latest tax system, if your total taxable income is under Rs 12 lakh, you qualify for a complete tax deduction of up to Rs 60,000 under Section 87A. This implies that you won’t owe any tax on income up to Rs 12 lakh.
However, once your regular income surpasses the Rs 12 lakh mark, you no longer meet the criteria for this fixed Section 87A discount. Consequently, the tax is computed directly based on the basic exemption limit of Rs 4 lakh, resulting in a tax liability of Rs 60,225 in your case.
This strategy of ‘marginal relief’ offers substantial help
To shield taxpayers from this significant tax burden, the legislation introduces “marginal relief.” This provision applies exclusively under the latest tax system. The concept of marginal relief is straightforward: When your regular income goes beyond Rs 12 lakh, your overall tax obligation is capped at the excess over the ₹12 lakh threshold. In your scenario, the calculation would look something like this:
Your income is Rs 1,201,500, just Rs 1,500 over the Rs 12 lakh threshold. Thanks to marginal relief, your total tax will be merely Rs 1,500, not Rs 60,225. This means you won’t have to pay more tax than the increase in your marginal income. The Income Tax Department will grant you the full marginal relief of the remaining Rs 58,725.
It’s crucial to note that this relief is not accessible to taxpayers who opt for the Old Tax System. Under the Old Tax System, once your total taxable income exceeds ₹5 lakh, you must pay the full tax at the initial slab rate without any marginal relief. Consequently, the New Tax System is highly advantageous for taxpayers who slightly surpass the threshold.