Marginal Relief in Income Tax 2025: A Game-Changer for the Middle Class
Budget 2025 has introduced marginal relief to ensure fairness in taxation, especially for middle-class earners. This provision prevents individuals whose income slightly exceeds a tax-free threshold from facing an excessive tax burden. The reform makes India’s tax system more progressive and ensures that small income gains do not lead to disproportionately high tax liabilities. Let’s break down how it works, why it matters, and who benefits the most.
Understanding Marginal Relief
Marginal relief ensures that if a taxpayer’s income just exceeds ₹12 lakh, they do not pay more tax than the excess income they earn. This prevents the cliff effect—where a minor salary increase results in a sudden spike in tax liability.
How It Works:
- Threshold: ₹12 lakh (tax-free under Budget 2025).
- Relief Range: ₹12 lakh to ₹12.75 lakh.
- Phase-Out: Once income crosses ₹12.75 lakh, full slab rates apply.
For example:
- If you earn ₹12.1 lakh (₹10,000 above ₹12 lakh), your tax is capped at ₹10,000 instead of ₹61,500.
- This ensures taxpayers don’t lose a significant portion of their earnings due to tax spikes.
How Marginal Relief is Applied
Your tax liability is the lower of the following:
- Tax as per slab rates.
- The amount by which your income exceeds ₹12 lakh.
Example Calculation:
| Taxable Income | Tax Without Relief | Tax With Relief | Savings |
|---|---|---|---|
| ₹12,10,000 | ₹61,500 | ₹10,000 | ₹51,500 |
| ₹12,50,000 | ₹67,500 | ₹50,000 | ₹17,500 |
| ₹12,75,000 | ₹71,250 | ₹71,250 | None |
Key Budget 2025 Reforms
- Higher Tax-Free Limit:
- ₹12 lakh for non-salaried individuals.
- ₹12.75 lakh for salaried employees (after considering ₹75,000 standard deduction).
- Break-Even Point: Marginal relief phases out at ₹12.75 lakh, after which regular slab rates apply.
- Eligibility: Available only for resident individuals (NRIs, HUFs, and businesses are excluded).
Why Marginal Relief is a Game-Changer
- Ensures Fair Taxation
- A small salary hike (e.g., ₹12 lakh to ₹12.1 lakh) should not result in an excessive tax jump.
- The marginal relief system ensures earnings remain proportional to taxation.
- Encourages Economic Growth
- Reduces tax burdens, encouraging higher earnings and spending.
- Expected to inject ₹1 lakh crore into the economy by increasing disposable income.
- Eases Taxpayer Concerns
- Makes tax compliance easier and reduces financial anxiety for professionals and freelancers.
Who Benefits the Most?
| Category | Gross Income | Taxable Income | Tax With Relief |
| Salaried | ₹13.5 lakh | ₹12.75 lakh | Zero |
| Non-Salaried | ₹12.1 lakh | ₹12.1 lakh | ₹10,000 |
Salaried employees benefit more due to the ₹75,000 standard deduction, effectively increasing their tax-free limit.
Avoid These Common Mistakes
- Crossing ₹12.75 Lakh: Once income exceeds this threshold, full tax rates apply.
- Example: ₹12.76 lakh income → ₹71,250 tax (no relief).
- Non-Eligibility: NRIs, HUFs, and businesses are not eligible.
- Lack of Awareness: Only 40% of taxpayers are familiar with marginal relief (CBDT survey).
How This Reform Transforms Taxation
- Empowers the Middle Class: Over 12.5 crore taxpayers collectively save ₹1 lakh crore.
- Encourages Workforce Participation: Particularly beneficial for women rejoining the workforce.
- Boosts Trust in the Tax System: Aligns tax liabilities with actual earnings, reducing tax evasion.
Expert Opinion on Marginal Relief in Income Tax:
CA Rohit Mehta : “Marginal relief makes taxation fairer for hardworking professionals. It ensures that small pay raises don’t lead to outsized tax burdens.”
How does marginal relief ensure fairness in taxation for incomes just above the threshold?
Marginal relief, introduced in Budget 2025, prevents a sharp tax increase for incomes slightly above ₹12 lakh. It ensures that taxpayers do not pay more tax than the excess income over this threshold. For instance, without relief, a ₹12.1 lakh income would attract ₹61,500 tax, but with relief, it drops to ₹10,000. This caps tax liability and ensures proportional taxation.
The relief phases out at ₹12.75 lakh, after which regular slab rates apply. Salaried individuals benefit more, as the ₹75,000 standard deduction effectively raises the tax-free limit. The reform is expected to save taxpayers ₹1 lakh crore, boosting disposable income and consumption.
This measure removes tax penalties on small salary hikes, simplifies compliance, and enhances financial security. It applies only to resident individuals, excluding NRIs and HUFs. Awareness remains a challenge, with 60% of taxpayers unaware of these benefits. Digital tools, like the Income Tax Department’s calculator, can help estimate savings.
By fostering fair and inclusive taxation, marginal relief strengthens trust in governance and supports middle-class financial growth.
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