New Tax Regime: Income of Rs 12.75 Lakh Exceeds Eligibility Threshold for Marginal Tax Relief Despite Standard Deduction

Tax Relief Conundrum for Middle-Income Earners

A seemingly minor salary increase can lead to confusion about tax liability under the new tax regime, particularly when income exceeds the Rs 12 lakh threshold, above which rebates eliminate tax.

To illustrate this point, consider two salaries: Rs 13.4 lakh and Rs 13.5 lakh. At first glance, the difference appears to be just Rs 10,000. However, the way taxes are calculated makes the outcome look uneven.

The calculation of taxes begins with the standard deduction of Rs 75,000. For a salary of Rs 13.4 lakh, the taxable income comes to Rs 12.65 lakh, while for a salary of Rs 13.5 lakh, it is Rs 12.75 lakh.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

The current tax slabs are as follows:

For Rs 13.4 lakh income, the total tax amounts to Rs 69,750. For Rs 13.5 lakh, it is Rs 71,250.

Marginal Relief is only granted if the tax payable is greater than the income earned above the rebate threshold of Rs 12 lakh. This is where the difference between the two salaries becomes apparent.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

At a salary of Rs 13.40 lakh, the net income is Rs 12.65 lakh, with a tax of Rs 69,750. However, the extra income earned above the tax-free limit is only Rs 65,000. Since the tax is higher than the extra income, the law caps the tax at exactly the extra income earned, resulting in a tax saving of Rs 4,750.

In contrast, at a salary of Rs 13.50 lakh, the net income is Rs 12.75 lakh, with a tax of Rs 71,250. The income above the threshold is Rs 75,000, which is already higher than the tax. As a result, the person is no longer in the "cliff" zone and pays the full tax as per the slabs.

This creates a situation where a person earning Rs 13.4 lakh gets relief, but someone earning Rs 13.5 lakh does not, even though the income difference is minimal. Marginal Relief acts as a safety net for middle-income earners who find themselves just over the tax-free threshold.

According to CA Chandni Anandan, Tax Expert at ClearTax, the logic behind this is simple: the government ensures that individuals are never asked to pay more in tax than the actual "extra" money they earned above the limit. However, as seen in the Rs 13.50 lakh salary bracket, once the income grows sufficiently high that the tax liability is less than the incremental income, the relief naturally narrows. This transition ensures that while the "cliff" is removed, the progressive nature of income tax is maintained for higher earners.