Marginal Tax Relief for FY 2025-26: How India’s New Rule Helps You Save Income Tax

The Union Budget 2025 introduced a major income tax relief for the middle class – making annual incomes up to ₹12 lakh completely tax-free* under the new regime. This means if your taxable income is ₹12 lakh or less, you owe zero tax* for the year. But what happens if you earn just a little above ₹12 lakh? Will a small raise suddenly land you with a hefty tax bill? Without any safeguards, earning even one rupee above ₹12,00,000 would disqualify you from the rebate and could result in a significant tax liability, potentially leaving you with less take-home pay than someone earning ₹12 lakh.

To prevent this unfair outcome, the government introduced marginal tax relief for FY 2025-26. Marginal relief ensures that if your income marginally exceeds the ₹12 lakh threshold, you only pay tax roughly equal to the extra income over ₹12 lakh, allowing you to save on income tax and keep your take-home virtually the same as someone at the threshold.

What is Marginal Tax Relief?

In simple terms, marginal tax relief is a provision that makes sure you don’t pay more tax than the extra income you earned beyond a tax-free limit. It’s a special relief under the new tax regime designed to smooth out the jump in tax when you cross the ₹12 lakh mark. Essentially, if your taxable income goes slightly above ₹12,00,000, marginal relief will cap your tax so that your post-tax income isn’t lower than that of someone earning ₹12 lakh.

As tax experts explain, this mechanism ensures a taxpayer “does not have to pay a tax higher than the additional income” that pushed them over the threshold.

Put another way, marginal relief is a tax saver for incomes just above the ₹12 lakh cut-off. For example, without this relief, an income of ₹12.1 lakh would incur about ₹61,500 in tax (under the new slabs), whereas ₹12 lakh incurs no tax. Marginal relief bridges that gap by reducing the tax bill dramatically – in this case, the person would pay only about ₹10,000 in tax on ₹12.1 lakh, which is equal to the ₹10,000 extra income earned. In effect, you only pay the tax that corresponds to the portion of income above ₹12 lakh, and nothing more. This smart relief prevents any nasty tax surprises when your salary or income grows slightly beyond the tax-free limit.

How Marginal Relief Works in FY 2025-26

Under the new income tax regime for 2025-26, any taxable income up to ₹12,00,000 attracts a full rebate of ₹60,000 (under Section 87A), resulting in a nil tax liability. For salaried individuals, the ₹75,000 standard deduction further boosts the effective tax-free limit – if your salary is ₹12.75 lakh, after the standard deduction your taxable income is ₹12 lakh, meaning you also pay zero tax. This change, hailed as the most significant tax relief in decades, benefits millions of taxpayers by putting more money in people’s hands. But what if your income is just above these limits? This is where marginal relief comes into play to ensure a fair transition between tax brackets.

The Central Board of Direct Taxes (CBDT) has clarified that marginal relief applies to incomes up to approximately ₹12.75 lakh. In practical terms, if your net taxable income is, say, ₹12.1 lakh, ₹12.5 lakh, or ₹12.7 lakh, you won’t pay the full tax normally due on those amounts. Instead, you’ll pay only a small tax equal to the amount by which your income exceeds ₹12 lakh, so that your take-home pay remains nearly as high as someone earning ₹12 lakh.

It’s important to note that this relief works automatically within the tax calculation. You do not need to fill out any special form or request; when you file your taxes under the new regime, the income tax department will compute the marginal relief for eligible cases so that your tax payable is adjusted down accordingly. This seamless implementation means you simply enjoy the tax savings without any extra hassle.

Who Benefits from Marginal Relief?

Marginal tax relief for FY 2025-26 is aimed at resident individual taxpayers whose incomes marginally exceed the ₹12 lakh tax-free threshold. It largely benefits salaried employees, professionals, and other individual taxpayers (including pensioners) under the new regime when their net taxable income falls in that ₹12–12.75 lakh window. Non-resident Indians and corporate taxpayers are not eligible for this relief, and it doesn’t apply to those sticking with the old tax regime either.

Both salaried and self-employed individuals can take advantage of marginal relief. In fact, salaried people already have a leg up: with the ₹75,000 standard deduction, a salaried individual can earn a gross income of ₹12.75 lakh and have it reduce to ₹12 lakh taxable – resulting in no tax at all.

For non-salaried individuals (who don’t get a standard deduction), the marginal relief essentially provides an equivalent benefit. It ensures that even if you don’t have the standard deduction, your income up to ₹12.75 lakh can be effectively tax-free when you are just over the ₹12 lakh mark. As tax experts note, income up to ₹12.75 lakh will be tax-free for salaried individuals by virtue of the rebate and standard deduction, and for non-salaried individuals, marginal relief makes roughly the same ₹12.75 lakh effectively tax-free for them as well.

However, keep in mind that marginal relief is completely phased out beyond ₹12.75 lakh of income. If your taxable income is, say, ₹13 lakh or more, you will be taxed normally according to the slab rates with no extra relief. In such cases, you may end up paying a substantial amount of tax, but the good news is that the Budget 2025 also widened the tax slabs themselves (for example, the 30% tax rate now kicks in at ₹24 lakh instead of ₹15 lakh) to reduce overall tax burdens. The combination of revised slabs and marginal relief ensures that all taxpayers get some benefit, and no one is unduly penalized for modest increases in income around the ₹12 lakh mark.

It’s also worth noting that the ₹12 lakh rebate and marginal relief apply only to regular income under the new regime. Special income like capital gains on investments are not covered by this rebate, so they continue to be taxed at their respective rates separately. For example, if part of your earnings is from stock market gains, those gains may still attract tax even if your total income is around ₹12 lakh. Marginal relief primarily concerns your salary or business/professional income that falls under the standard slab rates.

Key Points About Marginal Tax Relief (2025-26)

• Zero Tax up to ₹12 Lakh (₹12.75 Lakh for Salaried) Under the new tax regime, income up to ₹12,00,000 attracts no income tax because of a ₹60,000 rebate – the tax on this portion is waived off. Salaried taxpayers get an extra boost: with the ₹75,000 standard deduction, their effective tax-free income limit is ₹12.75 lakh (gross). In short, you can earn up to this level without paying any tax in FY 2025-26.
• No Tax “Cliff” for Slightly Higher Income
  
  Marginal relief is designed to ensure that earning a little above ₹12 lakh won’t punish you with a big tax jump. It guarantees that the extra tax you pay doesn’t exceed your extra income. In other words, those earning just over ₹12 lakh won’t take home less money than someone earning ₹12 lakh. This provision smooths the transition between tax brackets and removes the fear of a sharp tax cliff.
• Applicable Only up to ₹12.75 Lakh
  
  The relief is limited to incomes roughly between ₹12,00,001 and ₹12,75,000. Within this band, your tax is capped so that it never overshoots the incremental income. Once your income crosses about ₹12.75 lakh, marginal relief no longer applies – any income beyond that is taxed normally as per the slab rates. So, ₹12.75 lakh is effectively the upper ceiling for this tax relief benefit.
• Available in New Regime (Automatic Process)
  
  Marginal tax relief is available only under the new tax regime (the default in 2025-26). The good news is you don’t need to file any extra forms or make special claims to get it – the relief is automatically calculated when you file your income tax return in the new regime. As long as you opt for the new regime and your income qualifies, the tax department will adjust your liability accordingly. This makes it easy for you to avail the benefit without any paperwork or investment requirements.
• Doesn’t Cover Special Incomes
  
  Please note that the ₹12 lakh rebate (and marginal relief on top of it) applies to your taxable income under the slab rates. Certain types of income, like capital gains, lottery winnings, etc., are not eligible for this rebate and are taxed separately at special rates. So if your income includes large capital gains, those will still incur tax even if your overall income is around ₹12 lakh. Marginal relief mainly helps with the regular income portion under the new regime.

Why Do Slabs Still Exist If Income Up to ₹12 Lakh Is Tax-Free?

This is one of the most common questions after Budget 2025: if your taxable income is up to ₹12 lakh, your tax liability is zero under the new regime — so why do we still need slabs? The answer lies in how the rebate works versus how slabs work:

• Slabs set the basic structure of taxation

  For FY 2025-26, the new regime slabs are:
  
  
   

  ₹0 – ₹4 lakh	Nil
  ₹4 lakh - ₹8 lakh	5%
  ₹8 lakh - ₹12 lakh	10%
  ₹12 lakh - ₹16 lakh	15%
  ₹16 lakh - ₹20 lakh	20%
  ₹20 lakh - ₹24 lakh	25%
  Above ₹24 lakh	30%

• The rebate under Section 87A cancels out tax up to ₹12 lakh
  Even though slabs would normally impose some tax in the ₹4–12 lakh range, the ₹60,000 rebate wipes it out if your net taxable income is ₹12 lakh or less.
• Slabs matter once you cross ₹12 lakh
  For instance, if your income is ₹13 lakh, you don’t qualify for the rebate, and the slabs fully apply. That’s when marginal relief steps in — but only for incomes up to about ₹12.75 lakh. Beyond that, slabs alone decide your tax.

Who Is Eligible (and Not Eligible) for Marginal Relief?

The government has been clear that marginal relief is a targeted benefit. Here’s the breakdown:

1. Eligible for Marginal Relief

• Resident individual taxpayers under the new tax regime.
• Those whose net taxable income is slightly above ₹12,00,000 but not beyond roughly ₹12,75,000.
• Salaried individuals (with standard deduction of ₹75,000).
• Non-salaried/self-employed individuals, for whom marginal relief plays the role of extending the benefit up to ₹12.75 lakh.

2. Not Eligible for Marginal Relief

• Non-resident Individuals (NRIs) and HUFs (Hindu Undivided Families)
• Companies, LLPs, and partnership firms – relief is only for individual taxpayers.
• Taxpayers under the old tax regime. The rebate and marginal relief provisions are exclusive to the new regime.
• Individuals with income above ~₹12.75 lakh. Once you cross this mark, marginal relief no longer applies, and your tax is calculated strictly by the slabs.
• Special income like capital gains, lottery winnings, etc. These continue to be taxed separately at special rates and don’t get the benefit of marginal relief.