Understand Marginal Relief in Income Tax Act

What is Marginal Relief in Income Tax?

Marginal relief is a provision made by the Income Tax Act of 1961. It was designed for the taxpayers to reduce their burden of tax liability because of the minimal increase in their income, which makes them fall into the category of a higher tax slab. This increases the tax liability, and marginal relief helps in reducing it.

Marginal relief is different for the various categories of taxpayers, such as:

For Individuals

For individuals, marginal relief is applied to those having an income of more than Rs 50 lakhs. The marginal relief is given to individuals up to the amount that exceeds their income to fall under the category of the higher tax slab. If their income surpasses the amount of 50 lakhs by an xyz amount, that amount would be the marginal relief.

For Companies

According to the marginal relief in new tax regime, it is given to those companies whose income is more than 1 crore but less than 10 crores. This relief makes sure that the tax paid on the income exceeding 1 crore does not exceed the amount of income more than 1 crore.

For Firms/LLP/Local Authorities

The marginal relief for the local authorities, firms, and LLPs is that, if their income is more than Rs 1 crore, then the surcharge of 12% is levied on the total tax payable income for them. The marginal relief will be the difference between the excess tax paid on higher income and the amount of income that is more than Rs 1 crore.

How to Calculate Marginal Relief?

Marginal relief in income tax is applied when a taxpayer has to pay additional tax due to the minor increase in their income, which falls into a higher tax category. You can calculate it by using the online marginal relief calculator or by using its formula:

Marginal Relief = Additional Tax Payable - Excess Income Over the Threshold

Marginal tax relief can provide a lot of benefits to the people of the following categories:

• Investors: They earn dividends or capital gains that make them fall into a higher tax bracket.
• Senior Citizens: They can face high taxation on pension income without marginal relief.
• Salaried Individuals and Small Business Owners: Their income slightly crosses the higher tax slab.

Purpose of Marginal Relief

The purpose of Marginal Relief is as follows:

• Equitable Taxation: When the government offers marginal relief, its motive is to reduce the tax burden and balance it for the taxpayers. It makes sure that the taxpayers do not have to face an excessive hike in the tax liability due to a minor increase in income.
• Encouraging Fairness: Marginal Relief promotes fairness among the taxpayers, which benefits the people who otherwise face extreme tax jumps because of the minor increases in their income.

You should understand the concept of marginal relief because it allows companies and individuals to manage their tax liabilities in a better way, and it also ensures that they claim benefits from the tax provisions.