New Tax Regime Explained: Will Earning ₹1,500 Above ₹12 Lakh Result in a ₹60,225 Tax Bill?

Marginal Relief Rules Protect Taxpayers from a Huge Tax Burden If Income Slightly Exceeds the ₹12 Lakh Rebate Limit

Income Tax 2026: Many taxpayers worry that crossing the ₹12 lakh taxable income threshold under the new tax regime—even by a small amount—could lead to a massive tax liability. At first glance, it may appear that earning just ₹1,500 more than the rebate limit would eliminate the entire benefit available under Section 87A and result in a tax bill exceeding ₹60,000.

Fortunately, the Income Tax Act includes a built-in safeguard known as Marginal Relief, designed to prevent taxpayers from facing an unfair tax burden when their income exceeds the rebate limit by only a small margin.

Here's how the rule works and why taxpayers with a slight increase in income may not have to pay the full tax amount.

What Is the ₹12 Lakh Tax Rebate Under the New Tax Regime?

Under the new tax regime, resident individual taxpayers whose taxable income does not exceed ₹12 lakh are eligible for a rebate under Section 87A.

The rebate can reduce the tax liability by up to ₹60,000, effectively making the net income tax payable zero for eligible taxpayers within the prescribed income limit.

However, once taxable income crosses ₹12 lakh, the taxpayer technically becomes ineligible for this rebate. This often leads to confusion, with many believing that even a small increase in income could trigger a very large tax bill.

What Happens If Your Taxable Income Is ₹12,01,500?

Consider an example where your taxable income for the financial year is ₹12,01,500.

Since your income exceeds the ₹12 lakh rebate limit by ₹1,500, the normal tax calculation under the new regime would produce a tax liability of approximately ₹60,225 before relief.

At first glance, this appears unfair because earning just ₹1,500 extra would result in paying more than ₹60,000 in taxes.

Fortunately, that is not how the final tax liability is calculated.

How Marginal Relief Protects Taxpayers

To avoid such disproportionate tax outcomes, the Income Tax Act provides Marginal Relief under the new tax regime.

The objective of this provision is simple: a taxpayer should never pay more additional tax than the amount by which their income exceeds the rebate threshold.

Example Calculation

• Taxable income: ₹12,01,500

• Amount exceeding ₹12 lakh: ₹1,500

• Regular tax calculation: ₹60,225

• Marginal Relief available: ₹58,725

• Final tax payable: ₹1,500

In other words, instead of paying over ₹60,000 in taxes, the taxpayer pays only ₹1,500, which equals the amount by which the income exceeded the rebate limit.

This provision ensures that a small salary increase does not result in an excessive tax burden.

Why Marginal Relief Matters

Without marginal relief, taxpayers would be discouraged from accepting salary increments, bonuses, or additional income close to the rebate threshold because even a minor increase could result in a disproportionately high tax liability.

The relief mechanism eliminates this problem by ensuring that tax liability rises gradually instead of suddenly.

It makes the transition beyond the ₹12 lakh rebate limit much fairer and prevents taxpayers from losing almost their entire additional income to taxes.

Is Marginal Relief Available Under the Old Tax Regime?

This is an important distinction.

The benefit of marginal relief discussed above applies only under the new tax regime.

Taxpayers who continue with the old tax regime do not receive the same protection once they cross the applicable rebate threshold.

Under the old regime, once taxable income exceeds ₹5 lakh, the Section 87A rebate is no longer available, and the tax liability is calculated according to the applicable slab rates without this specific marginal relief mechanism.

As a result, taxpayers whose income exceeds the threshold by a small amount may face a significantly higher tax burden compared to those opting for the new regime.

Should Taxpayers Worry About Crossing ₹12 Lakh?

For most taxpayers choosing the new tax regime, crossing the ₹12 lakh mark by a small amount should not be a cause for concern. The marginal relief provision has been specifically introduced to ensure that a modest increase in income does not lead to an unreasonable jump in tax liability.

Before filing your Income Tax Return (ITR), calculate your taxable income carefully and understand which tax regime offers the greatest benefit based on your earnings, deductions, and exemptions. Proper tax planning can help you optimize your liability while remaining fully compliant with income tax laws.

Disclaimer: This article is intended for informational purposes only and should not be considered tax, legal, or financial advice. Tax laws may change over time, and individual tax liability depends on personal circumstances. Consult a qualified tax professional before making tax-related decisions.