Marginal relief on income tax

Marginal relief caps the extra tax at the extra income when income just crosses the Rs. 12 lakh rebate threshold or a surcharge threshold, so a small rise in income never triggers a large jump in tax.

Updated 16 July 2026 · Reviewed by Salary-Calculator.in

Marginal relief is the rule that prevents a small increase in income from causing a disproportionately large increase in income tax. When a person’s income just crosses a threshold that would otherwise sharply raise the tax, marginal relief steps in and limits the extra tax to the amount by which the income exceeds that threshold. Its guiding principle is simple: the rise in tax should never be more than the rise in income.

The rule matters at two points in the tax computation. The first is the Section 87A rebate threshold, which in the new regime makes income up to Rs. 12 lakh tax-free; just above Rs. 12 lakh the rebate disappears, and marginal relief cushions the fall. The second is at each surcharge threshold, where a surcharge suddenly applies to the whole of the tax once income crosses Rs. 50 lakh, Rs. 1 crore, Rs. 2 crore, or Rs. 5 crore. Both are the same idea applied in different places.

For a central government employee, the first of these is the one that usually matters, because a salary that lands just above the Rs. 12 lakh taxable mark is common, and marginal relief keeps the tax on that small excess to a few thousand rupees rather than tens of thousands. The surcharge relief affects only the most senior officers whose income crosses Rs. 50 lakh.

This article explains both mechanisms: the core principle, the rebate marginal relief at Rs. 12 lakh in the new regime with a worked example and the point at which it runs out, the surcharge marginal relief at the high-income thresholds, and how the two fit with the cess and the new and old regimes.

The core principle

Marginal relief exists to remove a cliff in the tax schedule. At certain incomes the tax does not rise smoothly; it jumps, because a rebate is withdrawn or a surcharge is switched on across the whole tax. Without relief, a person who earns a rupee more than the threshold could end up paying thousands more in tax, which would mean that the extra income leaves them worse off. Marginal relief closes that gap by capping the tax so that the additional tax never exceeds the additional income above the threshold.

Two features are common to both places marginal relief applies. It is worked on the tax before the 4 per cent health and education cess, and the cess is added afterwards on the reduced figure. And it applies only in the band just above the threshold; once income rises far enough that the ordinary tax is again lower than the income over the threshold, the relief falls away and the normal tax applies.

Rebate marginal relief at Rs. 12 lakh in the new regime

In the new regime, a resident individual with a total income up to Rs. 12 lakh pays no tax, because the Section 87A rebate, raised by the Finance Act 2025 to Rs. 60,000, cancels the whole of the slab tax. The moment income crosses Rs. 12 lakh, the rebate is lost, and the full slab tax on the income becomes payable. Marginal relief prevents this from producing a jump larger than the extra income.

The rule is that where the tax on the income exceeds the amount by which the income is above Rs. 12 lakh, the tax is reduced to that excess. Put as a calculation: let A be the income above Rs. 12 lakh, and B be the slab tax on the total income; where B is more than A, the tax payable is limited to A, and the difference (B minus A) is the marginal relief.

Take the illustration the Central Board of Direct Taxes itself uses, a total income of Rs. 12,10,000 in the new regime.

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 per cent cess	400
Tax payable	10,400

The slab tax of Rs. 61,500 (Rs. 20,000 on the Rs. 4 lakh to Rs. 8 lakh band, Rs. 40,000 on the Rs. 8 lakh to Rs. 12 lakh band, and Rs. 1,500 on the Rs. 10,000 above Rs. 12 lakh) is far more than the Rs. 10,000 by which the income exceeds Rs. 12 lakh, so the tax is capped at Rs. 10,000, and the cess brings it to Rs. 10,400. Without marginal relief the person would have paid Rs. 61,500 plus cess on an income only Rs. 10,000 above the tax-free ceiling.

Where the relief runs out

The relief does not continue indefinitely. As income rises above Rs. 12 lakh, the slab tax grows more slowly than the income does, and at a total income of about Rs. 12,70,500 the two are equal. Beyond that point the ordinary slab tax is less than the income over Rs. 12 lakh, so there is nothing to cap, and the full slab tax applies. Between Rs. 12 lakh and roughly Rs. 12,70,500, therefore, marginal relief is doing the work; above Rs. 12,70,500 it is spent. This rebate marginal relief is available to resident individuals only. It applies in the new regime; the old regime’s smaller Section 87A rebate, which reaches only a total income of Rs. 5 lakh, carries no marginal relief, so income just above Rs. 5 lakh in the old regime loses the rebate outright.

One limit is worth noting. The rebate, and so its marginal relief, covers only income taxed at the normal slab rates. Income taxed at a special rate, such as long-term or short-term capital gains under Sections 112A and 111A, is outside the rebate, so tax can still be due on that part even where the total is near Rs. 12 lakh.

Surcharge marginal relief at the high-income thresholds

A surcharge is an extra charge on the tax, not on the income, of high earners. The rates are 10 per cent where total income exceeds Rs. 50 lakh, 15 per cent above Rs. 1 crore, 25 per cent above Rs. 2 crore, and 37 per cent above Rs. 5 crore in the old regime, the new regime capping the top rate at 25 per cent. Because the surcharge switches on across the whole of the tax as soon as income crosses a threshold, it too creates a cliff, and marginal relief is provided at each of the four thresholds.

The rule mirrors the rebate rule. Where income exceeds a threshold, the tax and surcharge together cannot exceed the tax on the threshold income plus the amount by which the income exceeds the threshold. In other words, crossing Rs. 50 lakh, or Rs. 1 crore, or Rs. 2 crore, or Rs. 5 crore, cannot cost more in extra tax and surcharge than the extra income itself.

Take a taxable income of Rs. 50,10,000 in the new regime, just Rs. 10,000 over the Rs. 50 lakh threshold. The tax on Rs. 50,10,000 works out to Rs. 10,83,000, and the 10 per cent surcharge on that would be Rs. 1,08,300, so the tax plus surcharge would be Rs. 11,91,300. But the tax on exactly Rs. 50 lakh, where no surcharge applies, is Rs. 10,80,000. Marginal relief limits the tax plus surcharge to Rs. 10,80,000 plus the Rs. 10,000 of extra income, that is Rs. 10,90,000, so the surcharge is cut from Rs. 1,08,300 to Rs. 7,000, and the 4 per cent cess is then added on Rs. 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 same mechanism operates at Rs. 1 crore, Rs. 2 crore, and Rs. 5 crore, measured each time against the tax at that threshold. The full surcharge schedule and further worked examples are in the surcharge on income tax article.

What it means for a government employee

For the ordinary central government employee, the rebate marginal relief at Rs. 12 lakh is the one that matters, and it matters because a taxable income just above Rs. 12 lakh is a real possibility after dearness allowance and arrears push up the salary. An employee whose taxable income is, say, Rs. 12,20,000 does not pay the full Rs. 63,000 of slab tax; marginal relief caps it at around Rs. 20,000 plus cess. Knowing this prevents the common mistake of assuming that crossing Rs. 12 lakh by a little suddenly creates a large tax bill; it does not, because of marginal relief. The surcharge relief is relevant only to the most senior officers, at the apex pay levels, whose total income including other sources crosses Rs. 50 lakh.

Marginal relief carries forward unchanged under the Income-tax Act 2025 , in force from 1 April 2026, though the section numbers around the rebate and the regime change; the arithmetic of the relief is the same. For the year 2025-26, whose returns are filed from mid-2026, it is computed under the 1961 Act.

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. When income just crosses a threshold that would otherwise sharply increase the tax, either the Section 87A rebate threshold or a surcharge threshold, marginal relief limits the extra tax to the amount by which the income exceeds that threshold. The core idea is that the increase in tax should never be more than the increase in income.

How does marginal relief work at Rs. 12 lakh in the new regime?

In the new regime, a total income up to Rs. 12 lakh is tax-free because of the Section 87A rebate. Just above Rs. 12 lakh the rebate falls away, so without protection the tax would jump. Marginal relief limits the tax to the income above Rs. 12 lakh. For example, at a total income of Rs. 12,10,000 the slab tax is Rs. 61,500, but the income is only Rs. 10,000 over Rs. 12 lakh, so marginal relief caps the tax at Rs. 10,000, plus the 4 per cent cess.

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

The rebate marginal relief in the new regime applies up to a total income of about Rs. 12,70,500. Below that point the slab tax is more than the income over Rs. 12 lakh, so the relief bites and caps the tax. Above it, the ordinary slab tax is lower than the income over Rs. 12 lakh, so the relief no longer applies and the full slab tax is payable.

What is surcharge marginal relief?

A surcharge is an extra charge on the tax of high earners, applying at Rs. 50 lakh, Rs. 1 crore, Rs. 2 crore, and Rs. 5 crore of income. When income just crosses one of these thresholds, the surcharge suddenly applies to the whole tax, which could raise the total by more than the extra income. Marginal relief caps the tax plus surcharge so that it does not exceed the tax at the threshold plus the income above the threshold.

Does the old regime have marginal relief on the rebate?

No. The rebate marginal relief applies to the new regime, at the Rs. 12 lakh threshold. The old regime’s Section 87A rebate of Rs. 12,500 applies only up to a total income of Rs. 5 lakh, and it has no marginal relief, so income just above Rs. 5 lakh loses the rebate outright. Both regimes, however, carry surcharge marginal relief at the high-income thresholds.

Is cess added before or after marginal relief?

After. Marginal relief is applied to the tax (and, for the surcharge thresholds, to the tax plus surcharge) first, and the 4 per cent health and education cess is then charged on the reduced figure. So in the Rs. 12,10,000 example the tax after marginal relief is Rs. 10,000 and the cess of Rs. 400 is added on top, giving Rs. 10,400.

Does marginal relief apply to capital gains?

The rebate marginal relief covers only income taxed at the normal slab rates. Income taxed at a special rate, such as long-term or short-term capital gains under Sections 112A and 111A, is outside the Section 87A rebate and so outside its marginal relief. Surcharge marginal relief, by contrast, applies to the total tax including tax on such income, at the surcharge thresholds.

External references

References

Income-tax Act, Section 87A, and the Finance Act 2025 proviso providing marginal relief in the new regime where the total income exceeds Rs. 12 lakh, limiting the tax to the amount by which the income exceeds Rs. 12 lakh; the relief applies to resident individuals up to a total income of about Rs. 12,70,500.
Central Board of Direct Taxes illustration of the rebate marginal relief: on a total income of Rs. 12,10,000 the tax is Rs. 61,500, the marginal relief is Rs. 51,500, and the tax payable is Rs. 10,000 (plus the 4 per cent cess).
Income-tax Act, the surcharge rates (10, 15, 25, and 37 per cent in the old regime, capped at 25 per cent in the new regime) and the marginal relief on surcharge at the Rs. 50 lakh, Rs. 1 crore, Rs. 2 crore, and Rs. 5 crore thresholds, limiting the tax plus surcharge to the tax at the threshold plus the income above it.
Income-tax Act, the 4 per cent health and education cess charged on the tax (and surcharge) after marginal relief.
The provisions carry forward under the Income-tax Act, 2025 (in force from 1 April 2026), with the rebate and regime provisions renumbered; for the financial year 2025-26 the tax is computed under the Income-tax Act, 1961.