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Budget 2025 — AY 2026-27

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Marginal Relief in Income Tax — Surcharge & 87A

Q: What is marginal relief in income tax and who gets it?

Marginal relief ensures that the additional tax payable (due to surcharge or loss of rebate) does not exceed the incremental income that pushed the taxpayer into the higher surcharge bracket or above the rebate threshold. It is available automatically to individuals whose income crosses ₹50 lakh (surcharge brackets) or ₹12 lakh (87A rebate threshold under new regime). You do not need to claim it separately — the ITR computation tool applies it.

Q: How is surcharge marginal relief calculated for income just above ₹50 lakh?

When income crosses ₹50 lakh, a 10% surcharge applies on the total tax. Marginal relief = (Surcharge on income) minus (Income above ₹50 lakh). If the surcharge amount exceeds the incremental income above ₹50 lakh, the excess is given as relief. Example: Income ₹50.5L → surcharge = 10% of ₹1.275L = ₹12,750; incremental income above ₹50L = ₹50,000. Since surcharge (₹12,750) income above threshold.

Q: Do I need to manually calculate or declare marginal relief in ITR?

No. Marginal relief is automatically computed by the Income Tax Department's ITR utility (offline tool) and the e-filing portal's tax computation engine. The system applies both surcharge marginal relief and Section 87A marginal relief without any separate schedule or declaration. TaxClue's CA team also cross-checks this computation before filing your ITR to ensure correctness.

Q: Is marginal relief available in the old tax regime for AY 2026-27?

Yes. Surcharge marginal relief applies in both old and new tax regimes at all surcharge threshold crossings — ₹50L, ₹1Cr, ₹2Cr, ₹5Cr, and ₹10Cr. The Section 87A marginal relief (for income just above ₹12L) is specific to the new tax regime under Budget 2025. In the old regime, the 87A rebate is ₹25,000 (up to ₹5L income) and marginal relief applies at the ₹5L income boundary for old regime filers.

Marginal relief prevents your tax from exceeding the income by which you crossed a threshold — whether that’s the ₹50L surcharge boundary or the ₹12L Section 87A rebate limit under Budget 2025 new regime. Full guide with examples for AY 2026-27.

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Marginal ReliefSurcharge ReliefSection 87ABudget 2025New Tax RegimeAY 2026-27CA Managed Filing₹12L Tax FreeITR FilingMarginal ReliefSurcharge ReliefSection 87ABudget 2025New Tax RegimeAY 2026-27CA Managed Filing₹12L Tax FreeITR Filing

Concept Explained

What is Marginal Relief in Income Tax?

Marginal relief is a provision in Indian income tax law that prevents a situation where the tax payable (including surcharge or loss of rebate) exceeds the incremental income that caused the higher tax liability. In plain terms: you should never pay more extra tax than the extra income you earned above a threshold.

There are two distinct types of marginal relief applicable for AY 2026-27:

Surcharge marginal relief — applies at ₹50L, ₹1Cr, ₹2Cr, ₹5Cr, and ₹10Cr income crossings in both old and new regime.
Section 87A rebate marginal relief — new for Budget 2025 new regime; applies when income is between ₹12L and ~₹12.75L.

Both forms of marginal relief are automatically applied by the ITR filing utility — no separate declaration is required by the taxpayer.

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Budget 2025 Key Change

Section 87A rebate raised to ₹60,000 under the new regime, making income up to ₹12 lakh effectively tax-free. Marginal relief now operates in the ₹12L–₹12.75L band to prevent cliff-edge tax jumps.

Key Marginal Relief Facts

Prevents tax > incremental income above threshold
Auto-computed in ITR utility — no manual declaration
Applies at 5 surcharge income levels
Section 87A marginal relief: ₹12L–₹12.75L band
Available in both old and new tax regimes (surcharge)
AY 2026-27: 87A relief only in new regime
TaxClue cross-checks computation before every filing

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Type 1

Surcharge Marginal Relief — How It Works

Surcharge is an additional levy on income tax applicable when total income crosses specified thresholds. The surcharge rates for individuals under both old and new regime (FY 2025-26) are:

Income Range	Surcharge Rate	Marginal Relief Applies?	At Which Crossing?
Up to ₹50 Lakh	Nil	N/A	—
₹50L – ₹1 Crore	10%	Yes	Income just above ₹50L
₹1 Cr – ₹2 Crore	15%	Yes	Income just above ₹1 Cr
₹2 Cr – ₹5 Crore	25%	Yes	Income just above ₹2 Cr
₹5 Cr – ₹10 Crore	37%	Yes	Income just above ₹5 Cr
Above ₹10 Crore	37%	Yes	Income just above ₹10 Cr

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Marginal Relief Formula (Surcharge)

Marginal Relief = Surcharge Payable − (Income above threshold)
If this value is negative, no relief is needed. Relief is given only when surcharge exceeds the extra income earned above the threshold. Net tax = Tax + Surcharge − Marginal Relief + 4% Cess.

Type 2 — Budget 2025

Section 87A Marginal Relief — New Regime AY 2026-27

Under Budget 2025, the Section 87A rebate under the new regime was raised to ₹60,000, effectively making income up to ₹12 lakh tax-free. However, for income between ₹12L and ~₹12.75L, a sudden loss of the full ₹60,000 rebate would cause net tax to exceed the incremental income — marginal relief prevents this cliff effect.

Income Level	Tax Before Rebate	87A Rebate	Without Marginal Relief	With Marginal Relief
₹12,00,000	₹60,000	₹60,000	₹0	₹0
₹12,10,000	₹63,000	₹60,000 (partial)	₹3,000 (theoretical)	₹3,000 (≤ ₹10,000 extra income)
₹12,50,000	₹75,000	₹60,000 (partial)	₹15,000	₹15,000 (≤ ₹50,000 extra income)
₹12,75,000	₹82,500	Nil (income > rebate limit)	₹86,190 (with cess)	₹75,000 (capped at income above ₹12L)
₹13,00,000	₹90,000	Nil	₹93,600	₹93,600 (no relief needed)

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Practical conclusion: If your income under the new regime is between ₹12L and ₹12.75L, marginal relief applies automatically. Income above ₹12.75L — full tax applies without any rebate or marginal relief from this provision.

Worked Example

Marginal Relief Calculation — Step by Step

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Example 1: ₹50.2L Income

Tax at 30% slabs = ₹12.73L. 10% surcharge = ₹1.273L. Income above ₹50L = ₹20,000. Since surcharge (₹1.273L) > incremental income (₹20,000), marginal relief = ₹1,073L − ₹20,000 = ₹1,053L is NOT applicable this way — relief = surcharge − incremental income = ₹1.07L. Net tax = tax + (surcharge − relief) + cess.

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Example 2: ₹12.05L New Regime

Normal tax = ₹61,500. 87A rebate available = ₹60,000. Net tax after rebate = ₹1,500. Income above ₹12L = ₹5,000. Since net tax (₹1,500) < extra income (₹5,000), no marginal relief needed. Final tax = ₹1,500 + 4% cess = ₹1,560.

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Example 3: ₹12.75L New Regime

Normal tax = ₹82,500. 87A rebate = Nil (income above rebate ceiling). Without relief, tax + cess = ₹85,800. Income above ₹12L = ₹75,000. Tax exceeds extra income by ₹10,800 — marginal relief of ₹10,800 applies. Net tax = ₹75,000 (capped).

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Comparison Table

Marginal Relief — Income Levels & Net Tax

Income Level	Regime	Without Marginal Relief	With Marginal Relief	Effective Tax Rate
₹12,00,000	New	₹0 (87A rebate)	₹0	0%
₹12,10,000	New	~₹3,120 (with cess)	₹3,120	~2.6%
₹12,75,000	New	~₹85,800 (cliff!)	~₹78,000	~10.2%
₹50,20,000	New/Old	Higher (surcharge cliff)	Capped at ₹20,000 extra	~25%
₹1,00,10,000	New/Old	Higher (15% surcharge cliff)	Capped at ₹10,000 extra	~34%

Application & ITR Filing

How Marginal Relief is Applied in ITR

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Auto-Computed

The ITR offline utility and e-filing portal automatically compute marginal relief in Schedule-SI and tax computation. No separate Schedule or declaration required.

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Which ITR Forms

Marginal relief can appear in ITR-1, ITR-2, ITR-3, ITR-4, and ITR-5 depending on taxpayer type. It is reflected in the tax liability computation section.

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TaxClue Cross-Check

Our CA team manually verifies the marginal relief computation before submitting every return, especially for clients with income near threshold boundaries (₹12L, ₹50L, ₹1Cr).

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Old vs New Regime

In the old regime, 87A marginal relief applies near ₹5L income boundary. In the new regime (Budget 2025), it applies near the ₹12L boundary with a ₹60,000 rebate.

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Cess on Marginal Relief

4% Health & Education Cess is computed after applying marginal relief. Cess is on (Income Tax + Surcharge − Marginal Relief), not on gross tax.

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Advance Tax Relevance

For advance tax computation (quarterly), marginal relief should be factored into estimated tax liability to avoid 234B/234C interest on underpayment.

Frequently Asked Questions

Marginal Relief — Common Questions

Marginal relief ensures that the additional tax payable (due to surcharge or loss of rebate) does not exceed the incremental income that pushed the taxpayer into the higher surcharge bracket or above the rebate threshold. It is available automatically to individuals whose income crosses ₹50 lakh (surcharge brackets) or ₹12 lakh (87A rebate threshold under new regime). You do not need to claim it separately — the ITR computation tool applies it.

When income crosses ₹50 lakh, a 10% surcharge applies on the total tax. Marginal relief = (Surcharge on income) minus (Income above ₹50 lakh). If the surcharge amount exceeds the incremental income above ₹50 lakh, the excess is given as relief. Example: Income ₹50.5L → surcharge = 10% of ₹1.275L = ₹12,750; incremental income above ₹50L = ₹50,000. Since surcharge (₹12,750) < incremental income (₹50,000), no marginal relief applies here. Relief applies only when surcharge > income above threshold.

Budget 2025 raised the Section 87A rebate to ₹60,000 under the new regime, making income up to ₹12 lakh effectively tax-free. For income between ₹12 lakh and approximately ₹12.75 lakh, marginal relief ensures net tax payable does not exceed the income above ₹12 lakh. Example: Income ₹12.05L — normal tax = ₹61,500, 87A rebate = ₹60,000, net tax after rebate = ₹1,500, which equals income above ₹12L (₹5,000). Marginal relief here is ₹0 since tax (₹1,500) < incremental income (₹5,000).

No. Marginal relief is automatically computed by the Income Tax Department's ITR utility (offline tool) and the e-filing portal's tax computation engine. The system applies both surcharge marginal relief and Section 87A marginal relief without any separate schedule or declaration. TaxClue's CA team also cross-checks this computation before filing your ITR to ensure correctness.

Yes. Surcharge marginal relief applies in both old and new tax regimes at all surcharge threshold crossings — ₹50L, ₹1Cr, ₹2Cr, ₹5Cr, and ₹10Cr. The Section 87A marginal relief (for income just above ₹12L) is specific to the new tax regime under Budget 2025. In the old regime, the 87A rebate is ₹25,000 (up to ₹5L income) and marginal relief applies at the ₹5L income boundary for old regime filers.

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