Marginal Relief under Section 87A

Purpose:

• Section 87A provides a rebate on income tax for resident individuals whose total taxable income is close to the rebate limit.

• Marginal relief ensures that taxpayers just above the rebate threshold don’t lose the benefit entirely.

How it works

1. Rebate limit:

   • For FY 2025‑26 (AY 2026‑27, New Regime), rebate under Section 87A applies if taxable income ≤ ₹12,00,000.

   • Maximum rebate = ₹60,000.

2. Problem without marginal relief:

   • Suppose taxable income = ₹12,00,001.

   • Full rebate eligibility is lost → the individual may pay much higher tax on ₹1 extra.

3. Marginal relief:

   • Tax is reduced just enough so that the tax plus rebate doesn’t exceed the tax payable at the threshold income.

   • This smooths the “cliff effect” at the threshold.

Formula (simplified)

$$\text{Tax payable after rebate}=\text{Tax on total income}-\text{Minimum of (Rebate max, Tax on total income)}$$

• If your income slightly exceeds the threshold, marginal relief reduces tax proportionally instead of losing the full rebate.

Income Tax Without Marginal Relief in Income Tax

• Total Tax Without Marginal Relief = ₹63,750

• Tax Rebate Eligibility under Section 87A = ₹0 tax on ₹12,00,000 total income

• Excess Income Above ₹12,00,000 = ₹12,25,000 - ₹12,00,000 = ₹25,000

• Compute Marginal Relief: 

  • Excess Tax: ₹63,750

  • Excess Income: ₹25,000

  • Marginal Relief: ₹63,750 - ₹25,000 = ₹38,750

• Tax Payable with Marginal Relief = ₹63,750 - ₹38,750 = ₹25,000

• Adding 4% Cess = ₹25,000 + 4% = ₹26,000 (Total Tax)

• Summary: 

  • Original Tax Liability: ₹63,750

  • Marginal Relief: ₹38,750

  • Tax Payable: ₹25,000

  • Final Tax Payable with Marginal Relief with 4% Cess: ₹26,000

This is how marginal relief reduces the tax payable when the income exceeds ₹12 lakh but by a small margin, ensuring that only the additional tax on that excess amount is payable.