Important Keyword: Income Tax Marginal Relief, New Tax Regime, Tax Relief.

Marginal Relief under New Tax Regime

The concept of Marginal Relief, introduced by the Income Tax Department, serves as a beneficial measure for small taxpayers. It aims to ensure fairness in taxation and alleviate concerns that individuals may have about earning more income, fearing higher taxes. This provision is designed to smoothen the transition between tax brackets, ensuring that the tax burden increases gradually as income rises. Ultimately, it helps promote economic participation and incentivizes individuals to pursue additional earnings without undue tax apprehensions.

Understanding of Marginal Relief

Marginal relief serves as a vital tool for taxpayers to prevent a sharp increase in their tax burden when a slight income rise pushes them into a higher tax bracket. Without this relief, they would face a significant spike in their overall tax liability, as they’d be subjected to the higher tax rate on their entire income.

In scenarios where an individual’s income surpasses a certain threshold, triggering higher tax rates, it steps in to mitigate the impact of these elevated rates. Notably, this relief is applicable solely under the new tax regime. Therefore, if someone opts for the old regime, they won’t be eligible to claim marginal relief.

Relief in New Tax Regime

Under the new tax regime, individuals earning up to INR 7 lakhs are entitled to a rebate of INR 25,000. However, if their income slightly surpasses this threshold, leading to higher taxes, they can seek relief through marginal relief.

For claiming marginal relief, the total income considered includes earnings subject to slab tax rates, along with income from Short Term Capital Gains under section 111A and Long Term Capital Gains under section 112. It’s crucial to note that this relief does not extend to long-term capital gains under section 112A.

Eligibility to claim Relief

Residents, including senior citizens and super senior citizens, can avail of relief under the new tax regime. However, it’s important to note that this relief is exclusively applicable to residents and residents but not ordinarily resident individuals. Non-resident Indians are not eligible to claim this relief.

Calculation of Relief

Let’s break it down: Aditya’s total annual income for FY 2023-24 is INR 7,15,000, and he has opted for the new tax regime. According to the tax rates applicable under this regime, his tax liability amounts to INR 26,500. With a slight increase of INR 15,000 in his income, his tax due shoots up to INR 26,500.

In this scenario, Aditya can claim relief by calculating the difference between his tax liability and the income exceeding INR 7 lakhs:

Marginal relief = Tax liability – Income over INR 7 lakhs = INR 26,500 – INR 15,000 = INR 11,500

So, Aditya is eligible for a relief of INR 11,500. Consequently, he will pay taxes amounting to INR 15,000 plus education cess and interest, if applicable.

Examples

For a better understanding of this concept let us take a few different case scenarios of incomes and their taxability and the relief available on the same.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/