What Is Marginal Relief in Budget 2025 And How It Will Affect Your Taxes On Salary?

The Budget 2025 has brought a relief by coming up with the Personal Income Tax reforms specially focusing on the Average Income Group. The Income Tax Department following the budget has released FAQs providing more clarification on the budget which includes a crucial tax provision of marginal relief. This move is aimed at easing the financial burden on the class group who falls just above key income tax thresholds.

Under the Income Tax Act, a "marginal relief" is afforded to individuals and companies to decrease the extra burden of tax imposed by the surcharge. A surcharge is an additional amount of tax levied over and above the ordinary tax. It ensures that, due to income crossing certain slabs of taxation, the overall tax liability doesn't increase significantly.               

In simple terms, if an individual or company is just above the threshold for a higher tax rate, marginal relief helps by reducing or eliminating some of the surcharge. This way, the taxpayer doesn't end up paying an unfairly large amount of tax just because they are slightly above the limit for the higher tax rate. It's a way to ease the impact of the surcharge on their overall tax bill.

How does marginal relief work?

Let us study two individuals by names Ram and Shyam to clarify this concept of marginal relief.

Ram is a salaried employee in a company, and his annual salary is ?12,50,000. The recent 2025 budget states that there is no tax up to a threshold of ?12,00,000. Ram, however, enjoys the standard deduction of ?75,000, which reduces his taxable income to ?11,75,000. Hence, Ram's taxable income is below the threshold of ?12,00,000, and he has no tax liability as he also benefits from the rebate since his income is below 12lakhs now.    

On the other hand, Shyam is a proprietor running his own business and also earning ?12,50,000 per annum. Unlike Ram, Shyam does not enjoy the benefit of standard deduction as he is not a salaried employee and his taxable income remains at ?12,50,000. Since his income is slightly above the ?12,00,000 limit, Shyam would normally have to pay taxes based on the higher threshold. If there were no relief, the tax payable on an income of ?12,50,000 would be ?67,500.

This is where marginal relief applies. Marginal relief ensures that Shyam's tax burden is reduced so that he only pays ?50,000 in tax, instead of the full ?67,500. This eases the shock of being just over the ?12,00,000 threshold, so long as Shyam takes advantage of paying a lesser amount of tax due to the marginal relief.

In short, though both Ram and Shyam have the same income, the standard deduction benefits Ram, leaving him no tax payable. The benefit of marginal relief cuts Shyam's tax liability with that deduction not applied on him.      

In conclusion, marginal relief was introduced to create a fair tax system that considers the different income levels in society, ensuring that taxpayers are not burdened with disproportionately high taxes. This relief aims to make the taxation process more equitable, benefiting both individuals and the country as a whole. The new tax regime, Section 115BAC(1A), introduces marginal relief, which applies to resident individuals who have an income of over ?12 lakh but within the defined limit. Thereafter, after crossing that amount, no relief is applicable and the taxpayer has to pay the entire amount as the tax applicable in that slab.

How is rebate different from Marginal Relief?

Rebate is another tax benefit that is aimed at supporting middle-class income groups. While marginal relief applies to individuals with income between ?12 lakh and ?12.75 lakh, rebate is available to individuals whose income is below ?12 lakh. This rebate effectively reduces their tax liability to zero, ensuring that individuals with lower incomes do not have to pay taxes, further easing the financial burden on the middle class.

How is the marginal relief calculated?

Let’s continue the example of Ram and Shyam who have income of 12,50,000. What will be their tax liability with and without marginal relief?

As seen above, marginal relief is the amount arrived at by subtracting the excess tax amount (?17,500) caused by income being over ?12 lakh from the total tax liability arrived at using slab rates, which amounts to ?67,500.

In conclusion, by introducing marginal relief and rebate under the tax regime, Union Finance Minister Nirmala Sitharaman has portrayed a thoughtful, equitable approach that does not punish the middle-income group with highly disproportionate taxes on their earnings. In making relief available for those just above the ?12 lakh threshold, the government has been able to create a better balanced and fair taxation system with the promotion