Marginal Relief in Income Tax: Meaning, Calculation & Limits

Diwaker receives an income of ₹51,00,000. The 10% surcharge normally applies to an income above ₹50,00,000. Nevertheless, his ₹1,00,000 extra income should not raise his tax by more than ₹1,00,000.

• What is Marginal Relief?

  • It minimises an additional tax in case of incomes a bit exceeding a tax slab (such as ₹50,00,000 or ₹1 crore).
  • Ensures tax doesn’t jump unfairly.

• How is it calculated?

  • Step 1: Calculate tax normally (including surcharge).
  • Step 2: Check if the tax exceeds the extra income. If yes, relief is given.
     

Key Rule: Relief is applicable where the amount of additional tax exceeds that of the additional income.

What is Marginal Relief in Income Tax?

This year Diwaker will receive ₹51,00,000. According to the tax rule, those whose income exceeds ₹50,00,000 will be charged a 10% additional surcharge. His tax would skyrocket unexpectedly, and without any relief, all this is due to his having earned ₹1,00,000 or more. Yet, the government argues:

 "Higher tax should not be paid by the person whose additional income is also larger." Here, therefore, Diwaker receives Marginal Relief to bring this unfair jump down.

How Marginal Relief Works
 

• Purpose: Prevents taxpayers from losing money when their income barely crosses a tax slab (like ₹50,00,000 or ₹1 crore).
• Applies When:
   
  • Your income is slightly above a threshold (e.g., ₹50,00,000, ₹1 crore).
  • The extra tax (including surcharge) is more than the extra income earned beyond the limit.

Diwaker’s Tax Calculation (₹51,00,000 Income)
 

Key Points
 

• Relief is given only if the extra tax is more than the extra income.
• Applies only to a surcharge, not basic tax or education cess.
• Helps small businesses and salaried people avoid sudden tax shocks.

The Marginal Relief makes it obtain unrattled. The Marginal Relief makes sure that Diwaker does not have to pay ₹31,250 more to earn ₹1,00,000 more. The rise in taxes remains sensible.

Marginal Relief in Case of Surcharge (Section 87A)
 

Diwaker, a software engineer, made ₹51,00,000 this year. Usually, any amount more than ₹50,00,000 draws a certain surcharge that is 10% of his taxes. This would be unjust to impose an increment of ₹1,31,250 on his tax to earn ₹1,00,000 more. This is corrected by the Marginal Relief given in Section 87A.

How Section 87A Helps Diwaker
 

• Problem: Without relief, Diwaker's extra tax (₹1,31,250) is more than his extra income (₹1,00,000)
• Solution: The government limits the additional tax to match the extra income
• Result: Diwaker gets ₹31,250 relief (₹1,31,250 - ₹1,00,000)

Diwaker's Tax Calculation with Relief
 

Important Rules About Section 87A
 

• Only applies when income crosses ₹50,00,000 or ₹1 crore thresholds.
• Relief amount = Extra tax minus extra income.
• Doesn't apply to the education cess or the health cess.
• Available for both salaried and business taxpayers.

This rule makes sure that Diwaker would not be penalised for small income increases. His final tax is fair - he pays only ₹14,12,500 instead of ₹14,43,750. The system keeps tax increases reasonable when people earn slightly more.

Understanding Marginal Relief Calculation with Diwaker's Example

Diwaker is a hard worker, and this year he is making ₹51,00,000. Under normal circumstances, one will be subjected to pay more taxes (referred to as a surcharge) when one crosses the ₹50,00,000 barrier. However, the government provides him with Marginal Relief to ensure that he does not have to pay a lot of additional tax over the increment of his income to only ₹1,00,000.

How We Calculate Diwaker's Relief:
 

1. First, Calculate the Regular Tax:
   • Tax on ₹50 lakh = ₹13,12,500
   • Tax on ₹51 lakh = ₹13,42,500 + 10% surcharge = ₹14,43,750

2. Check the Difference:
   • Extra tax = ₹14,43,750 - ₹13,12,500 = ₹1,31,250
   • Extra income = ₹51 lakh - ₹50 lakh = ₹1,00,000

3. Apply Marginal Relief:
   • Since ₹1,31,250 (extra tax) > ₹1,00,000 (extra income)
   • Relief = ₹1,31,250 - ₹1,00,000 = ₹31,250

Diwaker's Final Tax:
 

Key Points to Remember:
 

• Relief only applies when the extra tax is more than the extra income.
• Only reduces the surcharge amount.
• Available for incomes just above ₹50,00,000 or ₹1 crore.
• Helps people not pay too much tax for small salary increases.

This calculation shows how Diwaker saves ₹31,250 because the government understands that a small raise shouldn't lead to a big tax jump. The system keeps things fair for hardworking people like Diwaker, who earn slightly2A80FF more than the tax bracket limits.

Conclusion

Marginal Relief resembles a tax safety net for an individual such as Diwaker, who has an income of ₹51,00,000 this year but is only ₹1,00,000 above the ₹50,00,000 limit. Otherwise, breaking that threshold would cost him ₹31,250 more in taxes, and that would be unfair since that increment is minimal. 

The relief makes him never pay an amount of extra tax that is more than the amount of extra income, thereby paying only the correct amount. The rule maintains equity in taxation on the side of working hard individuals and small enterprises when their income slips into upper brackets by small amounts. In the case of Diwaker, the last tax will be ₹14,00,000, keeping the well-earned income safe, as well as the right acting by the rule.

FAQs on Marginal Relief in Income Tax

1. What is Marginal Relief?

Marginal Relief is a tax benefit that prevents you from paying extra tax when your income barely crosses a threshold (like ₹50,00,000 or ₹1 crore). It ensures the additional tax doesn’t exceed the extra income you earned.

2. Who gets Marginal Relief?

Salaried employees, freelancers, or business owners whose income slightly exceeds tax slab limits (₹50,00,000, ₹1 crore, etc.) can claim it if their extra tax is more than their extra income.

3. How is Marginal Relief calculated?

Subtract your extra income (above the threshold) from the extra tax charged. If tax is higher, the difference is your relief.

4. Does Marginal Relief apply to all taxes?

No, only on the surcharge (extra tax on high incomes), not on basic tax or education/health cess.

5. What if my income is way above the threshold?

Marginal Relief works only for small excess amounts. If you earn significantly more, regular tax rules apply.

6. Is there a form to claim Marginal Relief?

No, it’s auto-adjusted in tax calculations when filing ITR if you qualify.

7. Can companies get Marginal Relief?

Yes, businesses with income just above ₹1 crore or ₹10 crore can also claim it.

8. Does Marginal Relief reduce my total tax?

It only limits how much extra tax you pay for crossing a threshold, it doesn’t lower your base tax.

9. What’s the maximum relief I can get?

It depends on how much your extra tax exceeds your extra income. The relief caps it at the difference.

10. Where can I check if I qualify?

Use an income tax calculator or consult a CA they’ll compare your tax with and without the threshold to see if relief applies.

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