Marginal Relief in Income Tax (New Regime): What It Is and How It Saves You Tax Above ₹12 Lakh

The ₹12 lakh cliff problem

Under the new tax regime, the Section 87A rebate — now Section 156 of the Income-tax Act, 2025 — gives a rebate of up to ₹60,000 to resident individuals with taxable income up to ₹12 lakh. Taxable income of ₹12,00,000? Slab tax works out to ₹60,000 (₹20,000 on the ₹4–8 lakh band plus ₹40,000 on the ₹8–12 lakh band), and the rebate wipes it to zero.

Now picture income of ₹12,00,001. One rupee more. The rebate condition fails — income exceeds the ₹12 lakh ceiling — so the whole ₹60,000 rebate disappears. Without any protection, that single extra rupee would cost you roughly ₹60,000 in tax. That is the cliff, and it would be absurd.

Marginal relief is the provision that removes it. The rule is simple: if your taxable income marginally exceeds ₹12 lakh, the tax you pay cannot be more than the amount by which your income exceeds ₹12 lakh. You can never pay more tax than the extra income you actually earned above the threshold.

Related guide: 80C is now Section 123 of the Income-tax Act, 2025 — what changed and what stayed the same.

How marginal relief works

The calculation has two steps:

1. Compute the normal slab tax on your taxable income (new-regime slabs: nil to ₹4 lakh, 5% on ₹4–8 lakh, 10% on ₹8–12 lakh, 15% on ₹12–16 lakh, 20% on ₹16–20 lakh, 25% on ₹20–24 lakh, 30% above ₹24 lakh).
2. Compare it with the excess income — that is, (your taxable income − ₹12,00,000). Your tax is the lower of the two, and 4% health & education cess is charged on that final tax.

Take a taxable income of ₹12,10,000. Normal slab tax: ₹20,000 + ₹40,000 + 15% of ₹10,000 = ₹61,500. Excess income: ₹10,000. The lower figure wins, so tax = ₹10,000, plus 4% cess = ₹400. Total: ₹10,400.

You earned ₹10,000 more and paid ₹10,400 of tax on it. The relief holds.

How far does the relief zone go?

Marginal relief stops mattering once the normal slab tax becomes smaller than the excess income — at that point you simply pay normal slab tax. Solving ₹60,000 + 15% × excess = excess gives an excess of about ₹70,588. So the relief zone runs from just above ₹12,00,000 to about ₹12,70,588 of taxable income.

For a salaried person claiming the ₹75,000 standard deduction, taxable income is salary minus ₹75,000. That shifts the whole band up: the relief zone covers gross salary from ₹12,75,001 to about ₹13,45,588. Below ₹12.75 lakh of salary, the rebate gives you zero tax outright.

At ₹12,70,588 of taxable income, both numbers meet at ₹70,588 (plus cess = ₹73,412). Beyond that, the slabs take over and there is no relief left to claim.

Worked examples with numbers

All examples use the new tax regime, a resident individual, FY 2025-26 / Tax Year 2026-27. Salaried examples claim only the ₹75,000 standard deduction.

Example 1: Salary ₹12.75 lakh — exactly at the threshold

This is why you keep reading “₹12.75 lakh is tax-free”. The ₹75,000 standard deduction pulls taxable income down to ₹12 lakh, and the rebate cancels the rest. Note the distinction: ₹12 lakh is the tax-free taxable income; ₹12.75 lakh is the tax-free salary.

Example 2: Salary ₹13 lakh — marginal relief kicks in

Example 3: Taxable income ₹12,10,000 (business income, no standard deduction)

Example 4: Salary ₹13.25 lakh

Example 5: Salary ₹13.45 lakh — relief ends here

Beyond this, regular slab rates apply in full — for instance, a salary of ₹14 lakh (taxable ₹13.25 lakh) means slab tax of ₹78,750 plus cess = ₹81,900, with no relief.

The raise that makes you poorer

Here is a strange but true result of the formula. Compare two salaries:

A ₹25,000 raise leaves you ₹1,000 worse off. Why? Marginal relief caps the tax at the extra income, but the 4% cess is charged on top of the capped tax. Anywhere inside the relief band, a raise costs you roughly 4% of it in cess — you keep almost nothing from the raise itself.

This is worth knowing before you negotiate a hike that lands you just above ₹12.75 lakh.

Who does NOT get marginal relief

The relief is narrow by design. It does not apply to everyone.

• Capital gains taxed at special rates: Short-term capital gains under Section 111A and long-term capital gains under Section 112A are excluded. The rebate — and with it, marginal relief — applies only to income taxed at normal slab rates. If you have a mix, the relief works only on the slab-rate portion.
• Lottery, betting, and other special-rate income: Not eligible.
• The old tax regime: The old regime has no such cushion. Its rebate (old Section 87A) is ₹12,500 up to ₹5 lakh of taxable income — cross ₹5,00,000 by even a little and the whole rebate vanishes, so ₹10,000 of extra income can cost ₹15,080 in tax. If you are close to that line in the old regime, deductions that pull taxable income back under ₹5 lakh are worth far more than their face value. (Not sure which regime fits you? See our new vs old tax regime comparison for 2026.)
• Non-residents: The rebate is for resident individuals only.

Also note: claiming 80C/80D-type deductions does not help here — Section 80C (now Section 123) and Section 80D (now Section 126) are available only in the old regime. In the new regime, the deductions that survive for salaried people are mainly the ₹75,000 standard deduction and the employer’s NPS contribution under Section 124 (old Section 80CCD(2)).

Freelancer note: if you opt for presumptive taxation under Section 58 (old Section 44ADA), your taxable income is 50% of gross receipts — the relief math above applies to that deemed income just the same. See our 44ADA guide for freelancers.

What changed and what stayed the same

Budget 2026 (Finance Act, 2026) kept the new-regime slabs, the ₹12 lakh rebate, the ₹75,000 standard deduction, and the marginal-relief rule unchanged for Tax Year 2026-27 — the term the Income-tax Act, 2025 uses instead of “financial year”. So every number above applies for the year currently in progress.

What did change from the old framework: the rebate section number. The rebate provision everyone calls “87A” is now Section 156 of the Income-tax Act, 2025. When you see “Section 87A” in older articles, it means the same rebate — the rule itself is unchanged.

Frequently asked questions

What is the difference between a rebate and marginal relief?

A rebate wipes your tax to zero — under the new regime, it applies if your taxable income is ₹12 lakh or less, cancelling tax of up to ₹60,000. Marginal relief is the safety net just above that line: if you earn slightly more than ₹12 lakh, it caps your tax at the amount by which your income exceeds ₹12 lakh, so there is no sudden jump.

Is marginal relief or rebate available on capital gains or lottery income?

No. Both apply only to income taxed at normal slab rates. Capital gains taxed at special rates (Section 111A, Section 112A) and winnings from lotteries or betting are excluded. You can still owe tax on those even if your total income sits near ₹12 lakh.

How much income is tax-free in 2026-27 under the new regime?

Taxable income up to ₹12 lakh is fully tax-free because of the ₹60,000 rebate. For salaried people, the ₹75,000 standard deduction means a gross salary of up to ₹12.75 lakh is tax-free. Under the old regime, the tax-free limit is ₹5 lakh of taxable income.

Why is ₹12.75 lakh called tax-free for salaried people when the real limit is ₹12 lakh?

Because the two figures measure different things. ₹12 lakh is the limit on taxable income (what the rebate looks at). A salaried person subtracts the ₹75,000 standard deduction first, so ₹12,75,000 of salary becomes ₹12,00,000 of taxable income — exactly at the rebate ceiling. Non-salaried taxpayers get no standard deduction, so their tax-free line is ₹12 lakh flat.

Up to what income does marginal relief apply?

Roughly ₹12,70,588 of taxable income — the point where the normal slab tax (₹70,588) equals the excess over ₹12 lakh. For salaried people claiming the ₹75,000 standard deduction, that translates to a gross salary of about ₹13.45 lakh. Beyond that, regular slab rates apply in full.

If my salary crosses ₹12.75 lakh by just ₹10,000, how much tax will I pay?

Taxable income would be ₹12,10,000. Normal slab tax is ₹61,500, but marginal relief caps it at ₹10,000 — the income above ₹12 lakh. Add 4% cess (₹400), and the total is ₹10,400. A tiny raise costs you a tiny tax.

Does marginal relief apply in the old tax regime?

No. The old regime has its own rebate (₹12,500 up to ₹5 lakh) but no cushion above it. If you are near the ₹5 lakh line in the old regime, even small extra deductions — 80C investments, HRA — can be worth far more than their face value because they keep you under the ceiling.

Is the 4% cess charged on top of the marginal-relief tax?

Yes. Cess is calculated after relief, on the capped tax amount. For example, capped tax of ₹25,000 becomes ₹26,000 after cess. This is why a raise inside the relief band still costs you something — about 4% of the raise.

Can I claim 80C/80D deductions in the new regime?

No. Section 80C (now Section 123) and Section 80D (now Section 126) are old-regime-only deductions. In the new regime you keep the ₹75,000 standard deduction (salaried and pensioners), the employer’s NPS contribution under Section 124, and a few special deductions — nothing else.

Official sources

• Income-tax Department, Government of India — official filing portal and new Act text
• Central Board of Direct Taxes (CBDT) — circulars and notifications

Rohan Mehta

Editorial byline for eircicai income tax guides — covering the Income Tax Act, 2025, section renumbering, regime comparison, and deductions. Content is reviewed by Asuthod Rathod, CA.