Marginal relief on income tax

Marginal relief caps the extra tax at the extra income when income crosses the Rs. 12 lakh rebate ceiling or a surcharge threshold. The rule and the limits.

Updated 9 September 2026

Marginal relief stops a small rise in income from producing a large rise in tax. Where income crosses a threshold that would otherwise sharply increase the liability, the rule limits the extra tax to the amount by which the income exceeds that threshold. Its principle is one sentence long: the rise in tax should never be more than the rise in income.

It operates at two separate points, under two different statutes. At the rebate ceiling, Section 156(2)(b) of the Income-tax Act, 2025 caps the tax on income just above Rs. 12 lakh in the default regime. At each surcharge threshold, Section 3(5) of the Finance Act, 2026 caps the total of income-tax and surcharge by the formula Tn = Rn + Sn. The two are the same idea in different places, and they are found in different Acts because the Income-tax Act supplies the rebate while the annual Finance Act imposes the surcharge.

For a central government employee the first one is what matters. A taxable salary landing a little above Rs. 12 lakh is ordinary once dearness allowance and arrears are counted, and marginal relief keeps the tax on that small excess to a few thousand rupees instead of tens of thousands. The surcharge relief reaches only officers at the apex levels whose total income crosses Rs. 50 lakh.

The principle: removing a cliff

Marginal relief exists because the tax schedule has cliffs in it. At certain incomes the tax does not rise smoothly but jumps, because a rebate is withdrawn in full or a surcharge is switched on across the whole of the tax. Without a correction, a taxpayer earning one rupee more than the threshold could pay tens of thousands more, so the extra income would leave them worse off.

Two features are common to both places the relief applies. It is worked on the tax before the 4% health and education cess, which is then charged on the reduced figure. And it operates only in a band just above the threshold: once income rises far enough that the ordinary tax is again below the cap, the relief is spent and the normal computation resumes.

What marginal relief is not is a concession that has to be asked for. It is part of the computation itself, so a return utility, an employer’s estimate under TDS on salary, and an advance tax calculation all apply it automatically once the regime and the income are fixed.

Rebate marginal relief at Rs. 12 lakh

In the default regime a resident individual with a total income up to Rs. 12 lakh pays no tax, because the rebate in Section 156(2)(a) of the Income-tax Act, 2025, the lower of the tax payable and Rs. 60,000, cancels the slab tax entirely. Slab tax on exactly Rs. 12 lakh is Rs. 60,000, which is why the two figures meet. The moment income crosses that ceiling the rebate is gone.

Section 156(2)(b) supplies the cushion. Where the tax on the income exceeds the amount by which the income is above Rs. 12 lakh, the rebate is the difference, so the tax payable is reduced to that excess. Let A be the income above Rs. 12 lakh and B the slab tax on the total income: where B exceeds A, the tax is limited to A, and the relief is B minus A. Section 156(3) caps the whole deduction at the income-tax payable at the Section 202(1) rates, so the relief can never turn the liability negative.

Take a total income of Rs. 12,10,000.

Item	Amount (Rs.)
Total income	12,10,000
Income above Rs. 12 lakh (A)	10,000
Slab tax on Rs. 12,10,000 (B)	61,500
Marginal relief (B minus A)	51,500
Tax after marginal relief	10,000
Add 4% cess	400
Tax payable	10,400

The slab tax of Rs. 61,500 is Rs. 20,000 on the Rs. 4 lakh to Rs. 8 lakh band at 5%, Rs. 40,000 on the Rs. 8 lakh to Rs. 12 lakh band at 10%, and Rs. 1,500 at 15% on the Rs. 10,000 above Rs. 12 lakh. Against an excess of Rs. 10,000, the relief cuts more than fifty thousand rupees off the bill.

Where the rebate relief runs out

The relief ends at a total income of Rs. 12,70,588, and the figure is arithmetic rather than a prescribed limit. Between Rs. 12 lakh and Rs. 16 lakh the slab tax is Rs. 60,000 plus 15% of the excess over Rs. 12 lakh. The relief bites while that exceeds the excess itself, so the crossing point solves 60,000 + 0.15d = d, giving d = Rs. 70,588. Above Rs. 12,70,588 the ordinary slab tax is the lower of the two figures and the full slab tax is payable.

Two limits attach to this relief. It is available to resident individuals only. And it covers only income taxed at the ordinary slab rates: income taxed at a special rate, such as long-term capital gains under Section 112A, sits outside the rebate and therefore outside Section 156(2)(b), so tax on that part is payable even where the total income is near Rs. 12 lakh.

The old regime has no equivalent. Section 156(1) gives a resident individual a rebate of up to Rs. 12,500 where total income does not exceed Rs. 5 lakh, and it carries no marginal relief limb at all. Income of Rs. 5,00,010 in the old regime loses the entire rebate and pays the ordinary slab tax, with no taper. The detail is in the Section 87A rebate article.

Surcharge marginal relief

A surcharge is a charge on the tax rather than on the income, and it applies to the whole of the tax once income crosses a threshold. That makes it a cliff of exactly the kind marginal relief exists to smooth, and Section 3(5) of the Finance Act, 2026 does the smoothing by formula:

Tn = Rn + Sn

where Tn is the amount beyond which the total payable as income-tax and surcharge shall not exceed, Rn is the total payable as income-tax and surcharge on the threshold amount, and Sn is the total income minus that threshold. Put plainly, crossing a threshold cannot cost more in extra tax and surcharge than the extra income.

The thresholds differ by regime

This is the point most often stated wrongly, and it turns on which entry of the surcharge table the taxpayer falls under.

For an individual taxed under Section 202, the default regime, serial 10 of the Table to Section 3(4)(b) sets the surcharge at 10% above Rs. 50 lakh, 15% above Rs. 1 crore and 25% above Rs. 2 crore. The table stops there. It has no Rs. 5 crore row and no 37% rate. Serial 6 of the Table to Section 3(5) accordingly gives marginal relief at three thresholds: Rs. 50 lakh, Rs. 1 crore and Rs. 2 crore.

For an individual taxed under the old regime, serial 2 of the Table to Section 3(4)(b) runs 10% above Rs. 50 lakh, 15% above Rs. 1 crore, 25% above Rs. 2 crore up to Rs. 5 crore, and 37% above Rs. 5 crore. Serial 1 of the Table to Section 3(5) gives marginal relief at all four.

Regime	Surcharge rates	Marginal relief thresholds
Default, Section 202	10%, 15%, 25%	Rs. 50 lakh, Rs. 1 crore, Rs. 2 crore
Old regime	10%, 15%, 25%, 37%	Rs. 50 lakh, Rs. 1 crore, Rs. 2 crore, Rs. 5 crore

The familiar statement that the default regime caps the surcharge at 25% is correct, but the mechanism is worth naming: no separate cap was imposed, the top band was simply never written into serial 10.

Both entries carry one further limit. Where total income includes dividend income or capital gains of the specified kinds, the surcharge on the tax computed on that part of the income shall not exceed 15%, whatever band the rest of the income falls in.

A worked surcharge example

Take a taxable income of Rs. 50,10,000 in the default regime, Rs. 10,000 over the first threshold.

Item	Amount (Rs.)
Income-tax on Rs. 50,10,000	10,83,000
Surcharge at 10%, before relief	1,08,300
Tax plus surcharge, before relief	11,91,300
Rn, tax and surcharge on Rs. 50 lakh	10,80,000
Sn, income over the threshold	10,000
Tn, the cap	10,90,000
Surcharge after relief	7,000
Tax plus surcharge, after relief	10,90,000

Without the relief an extra Rs. 10,000 of income would have cost more than Rs. 1,10,000 in extra tax and surcharge. The 4% cess is then charged on Rs. 10,90,000.

Where the surcharge relief runs out

Each threshold has its own exhaustion point, reached where the ordinary tax and surcharge fall back to the cap. For an individual in the default regime with income taxed wholly at the slab rates, and no dividend or capital gains attracting the separate 15% ceiling, the three points work out as follows.

Threshold	Surcharge above it	Relief runs out at about
Rs. 50 lakh	10%	Rs. 51,61,194
Rs. 1 crore	15%	Rs. 1,01,96,947
Rs. 2 crore	25%	Rs. 2,08,92,800

Each figure is the income at which the tax plus surcharge computed normally equals Tn. Above it the normal computation is the lower of the two and the relief has nothing left to do; below it the cap governs.

The cess sits outside the relief

The order of operations decides how much the cess costs, and it is fixed by the language of the two provisions. The Section 3(5) formula caps “the total amount payable as income-tax and surcharge thereon”, naming those two charges and no third. Section 3(15) of the Finance Act, 2026 then levies the 4% health and education cess on the aggregate of income-tax and surcharge.

The cess is therefore charged on the relieved figure and receives no marginal relief of its own. In the Rs. 12,10,000 case that means 4% of Rs. 10,000, or Rs. 400, rather than 4% of Rs. 61,500. The benefit of the relief flows through to the cess automatically, but the cess itself is never capped by the calculation.

What it means for a government employee

The Rs. 12 lakh relief is the one that reaches the ordinary employee, and it does so because of how central government pay is built. A taxable income a little above Rs. 12 lakh is a routine outcome once dearness allowance instalments and a pay fixation arrear land in the same year. An employee with a taxable income of Rs. 12,20,000 does not pay the Rs. 63,000 of slab tax the schedule suggests; marginal relief caps the tax at Rs. 20,000 plus cess.

The common error is the opposite of pessimism about it: employees decline arrears timing choices or worry about crossing the ceiling by a few thousand rupees, when the relief means the crossing is close to costless. What genuinely helps is relief under Section 157 where an arrear relates to earlier years, because that operates on a different problem, the bunching of several years into one.

The surcharge relief is relevant only at the top of the structure, where total income including other sources crosses Rs. 50 lakh. Where it does, the regime choice changes the picture more than usual, because the old regime carries a Rs. 5 crore band that the default regime does not have at all.

Which Act applies to which year

The provisions cited here are those in force for the tax year beginning 1 April 2026. For the financial year 2025-26, whose returns are filed from mid-2026, the computation runs under the Income-tax Act, 1961, where the rebate and its marginal relief sit in Section 87A and its proviso, and the surcharge and its relief in Section 2 of the Finance Act, 2026 with the Part I-A rates.

The Income-tax Act, 2025 carried the whole mechanism forward without changing the arithmetic. What changed is the numbering: the rebate moved from Section 87A to Section 156, and the default regime and its slab rates from Section 115BAC to Section 202. A computation done correctly under either Act on the same income produces the same figure, which is why the transition is a citation problem rather than a tax problem.

In force today

Marginal relief limits the extra tax on income just above a threshold to the extra income above it. At the rebate ceiling, Section 156(2)(b) of the Income-tax Act 2025 caps the tax on income above Rs. 12 lakh in the default regime, and the relief runs out at a total income of Rs. 12,70,588. It is for resident individuals, it does not reach special-rate income, and the old-regime rebate in Section 156(1) has no marginal relief at all. At the surcharge thresholds, Section 3(5) of the Finance Act 2026 caps income-tax and surcharge by the formula Tn = Rn + Sn: three thresholds in the default regime, Rs. 50 lakh, Rs. 1 crore and Rs. 2 crore under serial 6 of its Table, and four in the old regime, adding Rs. 5 crore, under serial 1. Serial 10 of the Table to Section 3(4)(b) has no 37% row, which is where the 25% default-regime ceiling actually comes from. The 4% cess under Section 3(15) is charged on the relieved figure and gets no relief of its own.

Frequently Asked Questions (FAQs)

What is marginal relief in income tax?

Marginal relief is a rule that stops a small rise in income from causing a large jump in tax. Where income just crosses a threshold that would otherwise sharply increase the liability, marginal relief limits the extra tax to the amount by which the income exceeds that threshold. It operates at two separate points in the computation, at the rebate ceiling under Section 156(2)(b) of the Income-tax Act 2025 and at each surcharge threshold under Section 3(5) of the Finance Act 2026, and the governing idea in both places is that the rise in tax should never exceed the rise in income.

How does marginal relief work at Rs. 12 lakh?

In the default regime a resident individual with total income up to Rs. 12 lakh pays nothing, because the rebate in Section 156(2)(a) of the Income-tax Act 2025, up to Rs. 60,000, cancels the slab tax. Just above Rs. 12 lakh the rebate falls away. Section 156(2)(b) then limits the tax to the income above Rs. 12 lakh. At a total income of Rs. 12,10,000 the slab tax is Rs. 61,500, the income is Rs. 10,000 over the ceiling, so the rebate is Rs. 51,500 and the tax payable is Rs. 10,000 plus the 4% cess.

Up to what income does the Rs. 12 lakh marginal relief apply?

Up to a total income of Rs. 12,70,588. Between Rs. 12 lakh and Rs. 16 lakh the slab tax is Rs. 60,000 plus 15% of the excess over Rs. 12 lakh, and marginal relief bites while that figure exceeds the excess itself. Setting the two equal gives an excess of Rs. 70,588, so at Rs. 12,70,588 the ordinary slab tax and the cap coincide. Above that point the slab tax is the lower figure and the relief has nothing to do.

What is surcharge marginal relief?

A surcharge is a charge on the tax, not on the income, and it switches on across the whole of the tax as soon as income crosses a threshold. Section 3(5) of the Finance Act, 2026 caps the result by the formula Tn = Rn + Sn, where Rn is the total of income-tax and surcharge on the threshold amount and Sn is the total income minus that threshold. The total of income-tax and surcharge cannot exceed Tn, so crossing a threshold never costs more in extra tax and surcharge than the extra income.

At which thresholds does surcharge marginal relief apply?

It depends on the regime, and this is where most summaries go wrong. For an individual taxed under Section 202 of the Income-tax Act 2025, the default regime, serial 6 of the Table to Section 3(5) of the Finance Act 2026 gives relief at three thresholds: Rs. 50 lakh, Rs. 1 crore and Rs. 2 crore. For an individual taxed under the old regime, serial 1 of the same Table gives relief at four: Rs. 50 lakh, Rs. 1 crore, Rs. 2 crore and Rs. 5 crore.

Is there a Rs. 5 crore surcharge threshold in the new regime?

No. Serial 10 of the Table to Section 3(4)(b) of the Finance Act 2026, which sets the surcharge for a person taxed under Section 202, runs 10% above Rs. 50 lakh, 15% above Rs. 1 crore and 25% above Rs. 2 crore, and stops there. It has no Rs. 5 crore row and no 37% rate. The 37% rate exists only at serial 2, the old-regime entry, where it applies to total income exceeding Rs. 5 crore. The often repeated statement that the new regime caps the surcharge at 25% is correct, but the reason is that the top band simply does not exist rather than that a separate cap was imposed.

Does the old regime have marginal relief on the rebate?

No. Section 156(1) of the Income-tax Act 2025 gives a resident individual in the old regime a rebate of up to Rs. 12,500 where total income does not exceed Rs. 5 lakh, and it carries no marginal relief limb. A taxpayer with a total income of Rs. 5,00,010 in the old regime loses the whole rebate and pays the ordinary slab tax. The taper exists only at the Rs. 12 lakh ceiling in the default regime. Surcharge marginal relief, by contrast, is available in both regimes.

Is cess added before or after marginal relief?

After, and this order matters. Marginal relief is applied to the income-tax, and at the surcharge thresholds to the income-tax and surcharge together, and the 4% health and education cess under Section 3(15) of the Finance Act 2026 is then charged on the relieved figure. In the Rs. 12,10,000 example the tax after relief is Rs. 10,000 and the cess is Rs. 400, giving Rs. 10,400.

Is there marginal relief on the cess itself?

No. The formula in Section 3(5) of the Finance Act 2026 caps “the total amount payable as income-tax and surcharge thereon”, and it names those two charges only. The cess is levied separately by Section 3(15) on the aggregate of income-tax and surcharge, so it is computed on the relieved figure and receives no relief of its own. The practical effect is small, because 4% of a reduced base is itself reduced, but the cess is never capped by the marginal relief calculation.

Does marginal relief apply to capital gains?

The rebate and its marginal relief cover only income taxed at the ordinary slab rates. Income taxed at a special rate, such as long-term capital gains on listed equity under Section 198 of the Income-tax Act 2025, formerly Section 112A of the Income-tax Act 1961, is outside the rebate and outside Section 156(2)(b), because Section 156(2) is framed against income chargeable under Section 202(1), so tax on that part remains payable even where the total sits near Rs. 12 lakh. Surcharge marginal relief is different: it applies to the whole tax, but the surcharge on the dividend and capital gains portion is itself capped at 15% under both the old-regime and the default-regime entries.

Is marginal relief automatic or must it be claimed?

It is automatic in computation. Marginal relief is not a deduction to be claimed in a schedule of the return; it is part of how the tax is worked out, so the return utility and the employer’s computation apply it once the income and the regime are entered. What a taxpayer must get right is the regime and the total income, because those decide whether the relief applies at all. A figure that ignores marginal relief is a computation error rather than a missed claim.

Does marginal relief apply to TDS on salary?

Yes. A drawing and disbursing officer deducting tax under Section 392 of the Income-tax Act 2025 computes the tax on the estimated salary for the year, and that computation includes the rebate and marginal relief, which is why an employee whose taxable salary lands just above Rs. 12 lakh sees a few thousand rupees of deduction rather than the full slab tax. The surcharge and its marginal relief enter the same estimate where the estimated income crosses Rs. 50 lakh.

Does marginal relief apply to firms and companies?

Yes, on the surcharge, and the thresholds differ by person. The Table to Section 3(5) of the Finance Act 2026 gives relief to an association of persons consisting only of companies at Rs. 50 lakh and Rs. 1 crore, to a co-operative society at Rs. 1 crore and Rs. 10 crore, to a firm or local authority at Rs. 1 crore, and to a domestic or foreign company at Rs. 1 crore and Rs. 10 crore. The rebate and its marginal relief, by contrast, are available only to a resident individual.

External references

References

Income-tax Act, 2025 (Act No. 30 of 2025), in force 1 April 2026, Section 156(1) (old-regime rebate of up to Rs. 12,500 where total income does not exceed Rs. 5 lakh, with no marginal relief), Section 156(2)(a) (rebate of the lower of the tax payable and Rs. 60,000 where total income does not exceed Rs. 12 lakh), Section 156(2)(b) (marginal relief where total income exceeds Rs. 12 lakh) and Section 156(3) (the deduction not to exceed the income-tax payable at the Section 202(1) rates).
Ibid., Section 202(1), Table, prescribing the slab rates of the default regime, from which the marginal relief break-even of Rs. 12,70,588 is derived by solving 60,000 plus 15% of the excess over Rs. 12 lakh against the excess itself.
Finance Act, 2026 (No. 4 of 2026, assent 30 March 2026), Section 3(5) and the Table thereto: marginal relief on surcharge by the formula Tn = Rn + Sn, at serial 1 for the old-regime individual at Rs. 50 lakh, Rs. 1 crore, Rs. 2 crore and Rs. 5 crore, and at serial 6 for a person taxed under Section 202 at Rs. 50 lakh, Rs. 1 crore and Rs. 2 crore.
Ibid., Section 3(4)(b) and the Table thereto: serial 2, the surcharge for an individual with income under Section 210 and none chargeable under Section 202, at 10%, 15%, 25% and 37%, with the surcharge on dividend income and capital gains capped at 15%; and serial 10, the surcharge for a person taxed under Section 202, at 10%, 15% and 25%, with no Rs. 5 crore band.
Ibid., Section 3(15): the health and education cess at 4% on the aggregate of income-tax and surcharge. The Section 3(5) formula caps “the total amount payable as income-tax and surcharge thereon” only, so the cess is charged on the relieved figure and carries no marginal relief of its own.
Ibid., Section 2, charging income-tax for the assessment year commencing 1 April 2026 under the Income-tax Act, 1961 at the Part I-A rates, which is the provision that governs the financial year 2025-26.
Income-tax Act, 1961, Section 87A and its proviso, granting the rebate and the marginal relief for years computed under that Act, and Section 112A on long-term capital gains, which the rebate does not reach.
Central Board of Direct Taxes illustration of the rebate marginal relief: on a total income of Rs. 12,10,000 the slab tax is Rs. 61,500, the marginal relief is Rs. 51,500, and the tax payable is Rs. 10,000 before the 4% cess.