If Rs 12 lakh is your taxable income, you should know this; check tax outgo calculations

Zero tax: Last week, Finance Minister Nirmala Sitharaman unveiled much-anticipated revisions to the personal income tax structure with the aim of alleviating the tax burden on the middle class, a move that had been advocated by a number of experts including Mohandas Pai and top economists, as well as industry associations such as the Confederation of Indian Industry (CII), the Federation of Indian Chambers of Commerce and Industry (FICCI), and the PHD Chamber of Commerce and Industry (PHDCCI).

Among the key changes announced was the introduction of a provision under which individuals with a taxable income of up to Rs 12 lakh would now be exempt from paying any taxes under the new tax regime, thanks to an increase in the Section 87A rebate to Rs 60,000. However, should an individual's taxable income exceed Rs 12 lakh—even marginally—the rebate would be lost entirely, resulting in a notable rise in their tax liability. This is where marginal relief comes into play.

Enacted under the Finance Act of 1961, marginal relief serves to mitigate excessive tax liabilities for individuals earning just above Rs 12 lakh. This provision aims to provide assistance to taxpayers who surpass the income threshold for higher taxes or surcharges by a small margin, thereby facing an elevated tax payment due to the slight income increase.

Without marginal relief

A person with a taxable salary of Rs 12,05,000 will otherwise have to pay Rs 60,750 tax. However, a person with an income that's just Rs 10,000 less doesn't pay any.

Income Slab (Rs)    Tax Rate    Tax Amount (Rs)
0 - 4,00,000    0%    0
4,00,001 - 8,00,000    5%    20000
8,00,001 - 12,00,000    10%    40000
12,00,001 - 12,05,000    15%    750

Total Tax Without Marginal Relief:        Rs 60,750
(No rebate as income exceeds Rs 12 lakh)    

With marginal relief

Your income surpasses Rs 12 lakh by Rs 5,000. With marginal relief in place, your total tax due is capped at Rs 5,000 (the amount exceeding Rs 12 lakh). Consequently, the tax payable is reduced to Rs 5,000 from Rs 60,750.

Marginal relief is applicable to individuals earning slightly above Rs 12 lakh, allowing them to pay only additional income as tax, rather than encountering a significant tax increase.

Therefore, taxpayers with total income exceeding Rs 12 lakh annually up to approximately Rs 12.7 lakh can utilise marginal relief. However, individuals earning up to Rs 12.7 lakh per year will ultimately receive a post-tax income of Rs 12 lakh, similar to those earning exactly Rs 12 lakh, considering the Rs 75,000 standard deduction.

It's important to note that the rebate does not apply to any portion of income that is taxed at special rates, such as Short-Term Capital Gains and Long-Term Capital Gains.