Marginal Relief in Income Tax – Meaning, Calculation & Eligibility (FY 2025–26)

India’s income tax system incorporates a progressive structure where tax rates increase with income. For high-income earners, an additional levy called ‘surcharge’ is imposed on the income tax payable once their income crosses specified thresholds. While this aims for greater contribution from those with higher earnings, it can sometimes lead to a peculiar situation where the increase in tax liability (due to surcharge) is more than the actual increase in income, particularly when income just slightly exceeds a surcharge threshold. This is where Marginal Relief steps in.  

Marginal relief is a provision designed to prevent this anomaly and ensure that the additional tax burden due to surcharge does not exceed the incremental income that pushed the taxpayer into the surcharge bracket. It’s a crucial relief mechanism for higher-income taxpayers, ensuring a more equitable tax outcome.  

Understanding Surcharge

Before delving into Marginal Relief, it’s important to understand surcharge. Surcharge is an extra tax levied on the amount of income tax. For individuals (including HUF, AOP, BOI, Artificial Juridical Person) for the Financial Year 2024-25 (Assessment Year 2025-26), surcharge rates vary based on income slabs and the chosen tax regime (Old or New):  

Surcharge Rates for Individuals (FY 2024-25 / AY 2025-26):

Export to Sheets

*(The maximum surcharge rate in the New Tax Regime for income exceeding ₹5 Crore is capped at 25%.)  

Surcharge is calculated on the income tax payable, not on the total income.

✅The Problem Marginal Relief Solves

Consider an individual in the Old Tax Regime whose income is, say, ₹51 Lakhs. Without marginal relief, they would pay income tax on ₹51 Lakhs plus a 10% surcharge on that income tax. Now consider another individual with an income of ₹50 Lakhs. They would pay income tax but no surcharge. The difference in income is just ₹1 Lakh, but the tax difference (due to the entire income attracting surcharge) could be significantly more than ₹1 Lakh, making it disadvantageous to earn that extra small amount. Marginal relief addresses this.  

How Marginal Relief is Calculated❓

Marginal relief ensures that the increase in tax liability (including surcharge) is restricted to the amount of income that exceeds the surcharge threshold. The relief is the difference between:

1. The total tax (including surcharge) on the actual total income.
2. The total tax (excluding surcharge) on the income at the threshold limit plus the amount of income exceeding the threshold.

Conceptual Formula:

Marginal Relief = [(Tax on actual income + Surcharge on tax on actual income) – (Tax on income at the threshold + Income exceeding the threshold)]

If the result of the first part (total tax with surcharge on actual income) is greater than the second part (tax at threshold + income exceeding threshold), the excess amount is granted as marginal relief.

Simplified Calculation Steps:

1. Calculate the income tax payable on the actual total income.
2. Calculate the surcharge applicable on this income tax.
3. Calculate the total tax (income tax + surcharge) on the actual total income.
4. Calculate the income tax payable on the income exactly at the nearest lower surcharge threshold.
5. Add the amount by which the actual income exceeds the threshold to the tax calculated in Step 4.
6. Subtract the amount from Step 5 from the amount in Step 3. If the result is positive, that is your Marginal Relief.

Example:

Let’s say an individual in the Old Tax Regime has a total income of ₹51,00,000 for FY 2024-25. The surcharge threshold is ₹50,00,000.

1. Tax on ₹51,00,000: (Using Old Regime tax slabs for simplicity, assuming age below 60)
   • Up to ₹2.5 Lakhs: ₹0
   • ₹2.5 Lakhs to ₹5 Lakhs: 5% of ₹2.5 Lakhs = ₹12,500
   • ₹5 Lakhs to ₹10 Lakhs: 20% of ₹5 Lakhs = ₹1,00,000
   • Above ₹10 Lakhs (on ₹41 Lakhs): 30% of ₹41 Lakhs = ₹12,30,000
   • Total Income Tax (before surcharge): ₹12,500 + ₹1,00,000 + ₹12,30,000 = ₹13,42,500
2. Surcharge on ₹13,42,500: 10% (since income > ₹50 Lakhs) = ₹1,34,250
3. Total Tax on ₹51,00,000 (with surcharge): ₹13,42,500 + ₹1,34,250 = ₹14,76,750
4. Tax on income exactly at the threshold (₹50,00,000):
   • Up to ₹2.5 Lakhs: ₹0
   • ₹2.5 Lakhs to ₹5 Lakhs: 5% of ₹2.5 Lakhs = ₹12,500
   • ₹5 Lakhs to ₹10 Lakhs: 20% of ₹5 Lakhs = ₹1,00,000
   • Above ₹10 Lakhs (on ₹40 Lakhs): 30% of ₹40 Lakhs = ₹12,00,000
   • Total Income Tax (on ₹50,00,000): ₹12,500 + ₹1,00,000 + ₹12,00,000 = ₹13,12,500
5. Tax at threshold + Income exceeding threshold: ₹13,12,500 (Tax on ₹50 Lakhs) + ₹1,00,000 (Income exceeding threshold) = ₹14,12,500
6. Marginal Relief: ₹14,76,750 (Step 3) – ₹14,12,500 (Step 5) = ₹64,250

In this example, the individual gets a marginal relief of ₹64,250, reducing their final tax liability (before Cess) from ₹14,76,750 to ₹14,12,500. This ensures that the extra ₹1 Lakh earned does not result in a tax increase of more than ₹1 Lakh.

(Note: A 4% Health and Education Cess would be added after calculating the final tax liability (after marginal relief if applicable).)  

Applicability

Marginal relief is applicable to individuals, Hindu Undivided Families (HUFs), Association of Persons (AOPs), Body of Individuals (BOIs), firms, co-operative societies, and companies, depending on whether their income crosses the respective surcharge thresholds. For individuals, it’s relevant at the ₹50 Lakh, ₹1 Crore, ₹2 Crore, and ₹5 Crore income levels.  

✅Claiming Marginal Relief

Taxpayers do not need to manually calculate marginal relief when filing their Income Tax Returns. The income tax e-filing utility or tax preparation software automatically calculates and applies marginal relief if it is applicable based on the total income entered by the taxpayer. It is important to accurately report all income details to ensure the correct calculation of tax liability and applicable relief.

Conclusion

Marginal relief is a crucial feature of the Indian Income Tax system that prevents an unfair tax burden on taxpayers whose income just crosses the surcharge thresholds. By limiting the additional tax due to surcharge to the amount of incremental income, it ensures a more equitable and progressive tax structure for high-income earners. While the calculation can seem complex, income tax filing software simplifies the process, making it automatically available to eligible taxpayers.