Earning above ₹12 lakh? Here’s how your tax could spike—or stay in check
Source: Live Mint
Imagine getting a salary bump, only to find that your tax bill eats up most—if not all—of your raise. While the new tax regime in Budget 2025 promises no tax on incomes up to ₹12 lakh, it doesn’t necessarily mean that earning a little more is always beneficial. Thankfully, marginal relief has your back, ensuring that small increases in income don’t result in a huge spike in tax outgo.
Here’s what you need to know to make sure your paycheck isn’t sabotaged by the taxman.
Understanding the new tax rebate
According to the Union Budget for 2025-26, presented by finance minister Nirmala Sitharaman, starting from next financial year, there will be no tax under the new regime on incomes up to ₹12 lakh. For salaried individuals, this limit is ₹12.75 lakh after accounting for the standard deduction.
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However, ₹12 lakh is not the absolute tax exemption limit. According to the tax slab rates, the tax liability at ₹12 lakh income would be ₹60,000. But, thanks to the rebate, you won’t actually have to pay that amount. Here’s the twist: What if your income slightly exceeds the rebate limit, say by ₹5,000? Does that mean you’ll have to pay the full ₹60,000 tax? Fortunately, the answer is no. Marginal relief steps in.
Marginal relief ensures that the maximum tax outgo on income that marginally exceeds ₹12 lakh is capped at the increase in income. For instance, if your income reaches ₹12.3 lakh, your tax liability as per the slab rates would work out to ₹67,080 (including a 4% cess). But with marginal relief, your actual tax outgo will be ₹30,000—equal to the increase in your income.
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This relief is available until your income reaches ₹12.75 lakh. For salaried individuals, once you account for the standard deduction, marginal relief applies to salaries up to ₹13.5 lakh.
Is your tax increasing with the raise?
While marginal relief helps contain excessive tax outgo for those marginally above the rebate limit, a sudden increase in income could still result in higher taxes, nullifying the benefit of the raise. Essentially, your post-tax income doesn’t improve till your income remains within the marginal relief zone.
Let’s illustrate this with an example:
Mr. A’s salary is ₹12.75 lakh. Since this is within the rebate limit, he doesn’t pay any tax. Then, Mr. A receives a 5% increment, raising his salary to ₹13.38 lakh—an increase of ₹63,750. However, because his income has crossed the rebate threshold, he now becomes liable for tax. The tax liability of ₹63,750 exactly matches his income increase. So, despite the raise, Mr. A’s post-tax income remains unchanged.
For Mr. A, increments up to 6% would be completely consumed by the tax outgo, resulting in no real increase in post-tax income.
Mayank Mohanka, founder of TaxAaram India and partner at S.M. Mohanka & Associates, explains that marginal relief also accounts for the 4% education and health cess. “The net tax to be paid with marginal relief is net of the cess, as stated in the FAQ on the income tax website,” he said.
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However, it’s important to note that the zero post-tax increment due to marginal relief only applies when your income jumps from the tax-free limit ( ₹12 lakh or ₹12.75 lakh for salaried individuals) to a level above it.
For example, if Mr. A’s salary was ₹12.5 lakh and he received a 5% increment, pushing his salary above the tax-free zone, he would still see an increase in his post-tax income. His new income would be ₹13.12 lakh, an increase of ₹62,500, and his tax liability would be ₹37,500.
As you can see, Mr. A’s tax outgo will not completely offset the increase in his income.
