Income tax relief: Rs 12.1 lakh vs Rs 12.5 lakh vs Rs 12.75 lakh - how marginal income tax will be calculated? 

Income tax calculations: The Union Budget 2025 raised the income tax exemption threshold to Rs 12 lakh, effectively making incomes up to this amount tax-free. For salaried individuals, this limit increases to Rs 12.75 lakh after factoring in the standard deduction of Rs 75,000 under the new tax regime for FY 2025-26. This has become possible due to revised tax slabs and an enhanced rebate of Rs 60,000 under section 87A.

However, social media users are divided on those earning salaries around Rs 12.75 lakh -- like Rs 12.1 lakh or Rs 12.5 lakh?

How much tax do I have to pay? Calculate now

Marginal relief

For salaried individuals, the standard deduction provides direct benefits. Non-salaried taxpayers earning slightly over Rs 12 lakh can also benefit from a mechanism called marginal relief. This provision helps ensure that individuals with incomes just above Rs 12 lakh do not face excessively high tax rates.

For example, a non-salaried individual earning Rs 12.1 lakh would typically owe ₹61,500 in taxes under the regular tax slabs. However, with marginal relief, this amount is significantly reduced to just Rs 10,000. This helps ensure that the tax burden remains proportional to the income above the Rs 12 lakh threshold.

Rs 12.1 lakh vs Rs 12.5 lakh vs Rs 12.75 lakh

Marginal relief is provided to resident individuals with income levels between Rs 12 Lakh and Rs 12.75 Lakh. Once an individual's income surpasses Rs 12.75 Lakh, marginal relief no longer applies, and they will be subject to the regular tax rates.

How much tax one has to pay with or without marginal relief on incomes of Rs 12.1 lakh, Rs 12.5 lakh, and Rs 12.7 lakh. Here's CBDT explanation.

The marginal relief will not apply to income over Rs 12.75 lakh.

Income (Rs )    Tax payable without marginal relief (Rs)    Tax payable with marginal relief (Rs)
12,10,000    61,500                                            10,000
12,50,000    67,500                                            50,000
12,70,000    70,500                                            70,000
12,75,000    71,250                                            71,250 [No marginal relief]

How is marginal relief calculated?

For income of Rs 12.1 lakh, the tax liability without marginal relief will be Rs 61,500. 

Income Range    Tax rate    Tax Amount

Rs 0 - 4 lakh    0            Rs 0
Rs 4-8 lakh    5%            Rs 20,000
Rs 8-12 lakh    10%            Rs 40,000
Rs 12L - Rs 12.10 lakh    15%    Rs 1500

Total tax    Rs 61,500

It is important to note that tax on income up to Rs 12 lakh is exempt due to the proposed rebate of Rs 60,000.

To calculate the marginal relief, we compare the tax liability without the relief to the amount exceeding the total income eligible for the rebate. In this instance, that amount is Rs 10,000 (Rs 12,10,000 - Rs 12,00,000).

As per the CBDT, the marginal relief in this scenario amounts to Rs 51,500. This calculation involves subtracting the income over Rs 12 lakh (i.e. Rs 10,000) from the total tax liability, resulting in Rs 61,500 - Rs 10,000.

Thanks to the marginal relief of Rs 51,500, the total tax due on an income of Rs 12.1 lakh will be only Rs 10,000.

Rebate vs marginal relief

Under the new regime, individuals earning Rs 12 lakh or less are eligible for a rebate, granting them full tax exemption. Conversely, for those earning slightly above Rs 12 lakh, a marginal relief is available to ensure that the tax burden is in line with their income.

Government estimates project a tax saving of Rs 1 lakh crore due to these changes. This is anticipated to increase disposable income and provide greater financial flexibility for taxpayers, according to the government.

Income Tax Changes in Budget 2025

Under the new Budget 2025 changes, there was an expectation among many taxpayers that income up to Rs 12 lakh would be tax-free. However, it is important to note that not all cases qualify for zero tax. Special rate incomes, like capital gains, are exempt from the Section 87A rebate.

Individuals earning up to Rs 12 lakh can now claim a full tax rebate under Section 87A in the new tax regime. This essentially makes income tax-free for salaried individuals, taking into account a Rs 75,000 standard deduction.

It is crucial to mention that if a part of your income is taxed at special rates, the rebate will not cover that portion. This applies to incomes such as Short-Term Capital Gains and Long-Term Capital Gains.