New ₹12 Lakh Tax Exemption & How Marginal Relief Saves You Money

The Union Budget 2025-26 has introduced a significant change in the income tax structure under the New Tax Regime by increasing the income tax exemption limit to ₹12 lakh. This means that individuals earning up to ₹12,00,000 per annum will not be required to pay any income tax.

However, there has been considerable confusion regarding the tax liability of individuals whose income exceeds this limit. A common misconception is that as soon as an individual’s income crosses ₹12 lakh, the entire taxable income becomes subject to tax, leading to a sudden and steep increase in tax liability. This is not entirely accurate due to a provision known as Marginal Relief.

This article explains the key aspects of the new income tax structure, the concept of marginal relief, and how it applies to individuals whose income slightly exceeds ₹12 lakh.

Revised Income Tax Structure for FY 2025-26

As per the new provisions announced in the budget, the income tax slabs under the New Tax Regime for FY 2025-26 are as follows:

Income Range	Tax Rate
₹0 – ₹4,00,000	0% (No Tax)
₹4,00,001 – ₹8,00,000	5%
₹8,00,001 – ₹12,00,000	10%
₹12,00,001 & above	15%

Under this new structure, any individual with a taxable income of ₹12 lakh or below will not be subject to income tax. However, once the income exceeds ₹12 lakh, tax is calculated based on the applicable slab rates. While this is straightforward, the concern arises when an individual earns just slightly above the ₹12 lakh threshold, leading to a disproportionately high tax liability compared to those earning just below the limit.

To address this issue, the provision of Marginal Relief has been introduced.

Understanding Marginal Relief

Marginal relief is a mechanism that ensures that individuals whose income slightly exceeds ₹12 lakh do not end up paying a significantly higher tax amount compared to those who fall just within the exemption limit.

The primary objective of this relief is to prevent an unfair tax burden on individuals who cross the exemption threshold by a small margin. Without this provision, a person earning ₹12,10,000 could face a tax liability of ₹61,500, while someone earning ₹11,90,000 would pay no tax at all. Such a situation would be inequitable, which is why marginal relief is applied.

How Marginal Relief Works

Marginal relief applies to individuals whose income falls between ₹12,00,000 and ₹12,75,000. It ensures that the increase in tax liability is not significantly higher than the additional income earned above ₹12 lakh.

Example Scenarios for Tax Calculation

To understand how marginal relief is applied, let’s examine different income levels and their corresponding tax calculations.

Example 1: Income = ₹11,90,000

• Since this income is below ₹12,00,000, no tax is payable.
• Total Tax Payable: ₹0

Example 2: Income = ₹12,10,000

Tax Calculation Without Marginal Relief

• ₹0 – ₹4,00,000 → 0% = ₹0
• ₹4,00,001 – ₹8,00,000 → 5% = ₹20,000
• ₹8,00,001 – ₹12,00,000 → 10% = ₹40,000
• ₹12,00,001 – ₹12,10,000 → 15% = ₹1,500
• Total Tax Before Marginal Relief = ₹61,500

Applying Marginal Relief

• Excess income over ₹12,00,000 = ₹10,000
• Marginal relief = ₹61,500 – ₹10,000 = ₹51,500
• Final Tax Payable = ₹61,500 – ₹51,500 = ₹10,000

By applying marginal relief, the tax burden is significantly reduced, preventing an abrupt increase in liability.

Example 3: Income = ₹12,50,000

Tax Calculation Without Marginal Relief

• Total Tax Before Marginal Relief = ₹67,500

Applying Marginal Relief

• Excess income over ₹12,00,000 = ₹50,000
• Marginal relief = ₹67,500 – ₹50,000 = ₹17,500
• Final Tax Payable = ₹67,500 – ₹17,500 = ₹50,000

Again, marginal relief ensures that the tax burden remains proportionate to the income earned.

Example 4: Income = ₹12,80,000

Tax Calculation Without Marginal Relief

• Total Tax Before Marginal Relief = ₹72,000

Since the income exceeds ₹12,75,000, marginal relief no longer applies.

• Final Tax Payable = ₹72,000

Thus, individuals earning above ₹12,75,000 must pay the full tax amount as per the slabs.

Eligibility for Marginal Relief

Marginal relief is available under the following conditions:

• The individual’s taxable income falls between ₹12,00,000 and ₹12,75,000.
• The tax liability calculated using standard slab rates is significantly higher than the additional income earned above ₹12,00,000.
• The relief is applied only to the portion of tax that exceeds the additional income earned.

If the taxable income exceeds ₹12,75,000, marginal relief does not apply, and tax must be paid in full according to the slab rates.

Key Takeaways and Conclusion

The increase in the income tax exemption limit to ₹12 lakh under the New Tax Regime is a major relief for taxpayers, as it significantly reduces the tax burden for a large section of earners.

For individuals earning slightly above this threshold, marginal relief ensures that they do not face an unreasonable tax jump. It provides a gradual transition into taxation, preventing sudden and excessive tax liability.

Summary of Key Points:

• The new tax exemption limit is ₹12 lakh, meaning no tax is payable up to this income level.
• If income exceeds ₹12 lakh, tax is calculated as per the new slabs.
• Marginal relief applies if income falls between ₹12,00,000 and ₹12,75,000, reducing the sudden tax spike.
• Once income crosses ₹12,75,000, marginal relief no longer applies, and the full tax must be paid.

Understanding this provision can help individuals in effective tax planning and ensure they do not overpay due to misconceptions about taxation.

For further details on tax-saving strategies or filing assistance, consult a professional tax expert to optimize your tax payments effectively.