Under the new tax regime, individuals with income up to ₹12.75 lakh may face tax liability despite a ₹12 lakh rebate. While your salary may not attract TDS, other income sources like bank interest can push your total income above the limit, making you liable for tax. Marginal relief can help cap your liability if your income only slightly exceeds the threshold.
Many taxpayers are currently navigating the complexities of the new income tax regime, which offers a rebate under Section 87A for individuals with a taxable income of up to ₹12 lakh. However, a common misunderstanding is that this rebate covers all income streams simply because no Tax Deducted at Source (TDS) was applied to a monthly salary. The reality for many middle-income earners is that their total tax liability is calculated based on their entire annual income, not just their salary.
Employers typically calculate TDS based only on the salary they pay, after accounting for the standard deduction of ₹75,000. If that salary figure remains within the rebate limit, the employer may not deduct any tax. This can create a false sense of security for taxpayers who have other earnings, such as interest from savings accounts, fixed deposits, or rental income from property. When these additional earnings are combined with salary during the filing of an Income Tax Return (ITR), the total income can easily cross the ₹12 lakh mark, triggering a tax liability that was not captured by the employer’s payroll system.
How Marginal Relief Works
For those whose total income marginally exceeds the ₹12 lakh threshold, the government provides a mechanism called marginal relief. This provision is designed to ensure that the tax burden does not become disproportionately high just because the taxpayer has crossed the rebate limit by a small amount. In such cases, the tax payable is capped so that it does not exceed the difference between the total income and the ₹12 lakh threshold.
For example, if an individual has a taxable income of ₹12.35 lakh after the standard deduction, the standard slab rates might initially calculate a tax of ₹65,250. However, because their income is only ₹35,000 above the ₹12 lakh rebate limit, marginal relief allows them to pay only that ₹35,000 in tax rather than the full amount calculated by the slabs. This prevents a situation where a small increase in income results in a significantly higher tax payout.
Managing Your Tax Filing
To avoid unexpected tax demands or penalties, it is essential for taxpayers to aggregate all their income sources before finalizing their tax calculations. This includes reporting interest earned on bank deposits and any rental income, as these are often overlooked by salaried individuals. Investors should review their Form 26AS and AIS (Annual Information Statement) on the income tax portal to ensure all income sources are captured before filing. The key monitorable for taxpayers is to calculate their total income including non-salary sources to determine if they truly fall under the rebate limit or if they need to set aside funds for their tax liability.