Marginal Relief under New Tax Regime

The recent Finance 2023 modifications have brought about alterations to the income tax slabs within the latest tax regime. Under this update, individual taxpayers with a taxable income of up to ₹7 lakh are entitled to a tax rebate of ₹25,000. However, it is noteworthy that a slight increase in income beyond the ₹7 lakh threshold can result in a higher tax liability. To mitigate this potential burden, the new tax regime has incorporated a provision known as marginal relief. This article delves into the concept of marginal relief in the updated tax structure and elucidates how it serves as a beneficial measure for small-scale taxpayers.

In the new tax regime, if an individual's taxable income exceeds ₹7 lakh by a mere ₹10, they lose the ₹25,000 rebate outlined in Section 87A. Consequently, the entire taxable income becomes subject to the applicable slab rates, resulting in an higher tax liability. This gives rise to a paradoxical situation wherein a slight income increment leads to higher tax payments. Recognizing this issue, the finance ministry introduced marginal relief as a corrective measure to alleviate the tax burden on taxpayers. Marginal relief ensures that the tax payable does not exceed the income that exceeds ₹7 lakh, offering relief for the excess tax amount.

Let's take the case of Mr. Ramesh, who is a salaried employee working for Bolka Foods Pvt Ltd. In the fiscal year 2023-24, he receives an annual salary amounting to ₹750,010. Upon choosing the new tax regime and availing the standard deduction of ₹50,000, his taxable income is adjusted to ₹700,010.

In the current scenario, given that Mr. Ramesh's taxable income exceeds the rebate threshold by a mere ₹10, he becomes ineligible to claim the ₹25,000 rebate specified in Section 87A. Consequently, his entire taxable income of ₹700,010 falls under the purview of the applicable slab rates in the new tax regime. This results in an income tax liability (excluding Health Cess) for Mr. Ramesh amounting to ₹25,000. Essentially, the addition of just ₹10 to his income beyond the ₹7 lakh threshold obliges Mr. A to pay ₹25,000 in income tax (excluding Health Cess).

This situation gives rise to a paradox where a slight increase in income beyond ₹7 lakh can lead to a higher tax liability than the actual additional income earned. Recognizing this issue, the finance ministry has taken corrective measures by introducing marginal relief. This relief is incorporated through the insertion of a new proviso into Section 87A.

It is applicable in the new tax regime for individuals, Hindu Undivided Families (HUFs), Association of Persons (AOPs), and Body of Individuals (BOIs) whose taxable income falls within the range of ₹700,005 to ₹727,770 in the fiscal year 2023-24 and beyond.

The advantage of marginal relief for small taxpayers lies in its role in preventing the tax payable from surpassing the income that exceeds ₹7 lakh. When the calculated tax on the income under the new regime exceeds the additional income beyond ₹7 lakh, marginal relief comes into play. In such cases, taxpayers are eligible for relief on the excess amount of tax.

To illustrate the benefits of marginal relief for small taxpayers, consider the following Table:

Marginal relief becomes applicable to taxpayers choosing the new tax regime under section 115BAC(1A) from April 1, 2023, for the fiscal year 2023-24 onwards. This initiative serves is a push for taxpayer's transition to the new tax structure, characterized by the absence of exemptions or deductions on investments. However, it's crucial to note that if a small taxpayer intends to stick with the old tax regime in the fiscal year 2023-24, commencing from April 1, 2023, they won't be able to avail themselves of the advantages offered by marginal relief.

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