Marginal relief

The section 87A rebate has a cliff edge. Earn Rs 12,00,000 under the new regime for FY 2025-26 and the rebate wipes out the tax entirely. Earn Rs 12,00,001 and, without a fix, the rebate disappears and the whole slab tax lands at once. The taxpayer with one rupee more income would take home tens of thousands less.

Marginal relief is the fix. It ensures the tax payable on the income just above the threshold never exceeds the amount by which the income crosses the threshold. Earn Rs 20,000 over the line, pay at most Rs 20,000 of tax.

Where the thresholds sit (as the workbook states them):

The three steps, exactly as the workbook sets them out:

Step 1: Excess = Total income - threshold (Rs 7,00,000 or Rs 12,00,000)
Step 2: Tax    = tax on total income, computed normally
Step 3: Marginal relief = Step 2 - Step 1

Net tax payable = Step 1   (i.e. the excess itself)

Where the relief runs out. Marginal relief only helps while the normal tax exceeds the excess. The workbook gives the break-even points: for FY 2024-25, incomes up to Rs 7,28,000 pay only the amount by which income exceeds Rs 7 lakh; for FY 2025-26, that holds for incomes up to Rs 12,71,250. Beyond those, ordinary tax is lower than the excess and marginal relief is no longer needed.

Where the rebate does not reach at all. Section 87A is not available against tax payable under section 112A on long-term gains from equity shares, equity-oriented units, certain ULIPs or business trust units chargeable to STT, nor against the tax on the accumulated balance of a recognised provident fund under section 111.

The workbook's Caselet 4, in full.

FY 2024-25. Total income Rs 7,10,000, tax on it Rs 21,000.

Step 1  Excess over Rs 7,00,000        = Rs 10,000
Step 2  Tax on total income            = Rs 21,000
Step 3  Marginal relief = 21,000 - 10,000 = Rs 11,000
        Net tax payable                = Rs 10,000

FY 2025-26. Total income Rs 12,20,000, tax on it Rs 61,500.

Step 1  Excess over Rs 12,00,000       = Rs 20,000
Step 2  Tax on total income            = Rs 61,500
Step 3  Marginal relief = 61,500 - 20,000 = Rs 41,500
        Net tax payable                = Rs 20,000

Read the second case as a client would. Without marginal relief, a raise from Rs 12,00,000 to Rs 12,20,000 — Rs 20,000 more — would have created Rs 61,500 of tax where there was none, leaving the taxpayer Rs 41,500 worse off for earning more. With the relief, the extra Rs 20,000 costs exactly Rs 20,000 and she breaks even. Not until income passes Rs 12,71,250 does the ordinary computation take over.

Chapter 7 (Concepts of Taxation), section 7.11 (Rebate under section 87A), and Chapter 13, Caselet 4, which works both years step by step. This is one of the most reliably computational items in the tax modules: expect to be handed a total income and a tax figure and asked for the marginal relief or the net tax. The three-step method above is the method the workbook expects you to reproduce.

• Marginal relief is not the rebate. The rebate is Rs 25,000 or Rs 60,000 of tax removed; marginal relief is a separate cap applied just above the threshold.
• Net tax payable equals the excess income, not the rebate amount. Candidates often stop at Step 3 and report the relief as the tax.
• The thresholds differ by year and regime — Rs 7,00,000 for FY 2024-25 and Rs 12,00,000 for FY 2025-26 under the new regime, and Rs 5,00,000 with a Rs 12,500 rebate under the old. Read the year in the question.
• Relief stops at Rs 7,28,000 and Rs 12,71,250 respectively. Applying it to an income of Rs 15 lakh is wrong.
• The rebate is not available against section 112A tax on equity long-term gains, however small the total income.
• It is a resident individual benefit. Section 87A does not reach a HUF, a firm, or a non-resident.