The Finance Act 2023 passed by the Lok Sabha recently has introduced a provision of marginal relief to small taxpayers for those taxpayers whose income outpaces the tax-free income of ₹7 lakh marginally.
The tax rebate under section 87A of ₹25,000 is offered to those earning up to ₹7 lakh. This limit was raised from ₹12,500 to ₹25,000 in the Budget 2023 to make the new regime more attractive.
It is, however, vital to note that the provision of marginal tax relief is applicable only for taxpayers opting for the new tax regime. This relief is expected to render the new tax regime more attractive for taxpayers.
This will convince more taxpayers to opt for the new tax regime over the old one.
It is vital to mention here that in the new tax regime, income that falls between ₹3-6 lakh attracts a tax rate of 5 percent. Those who fall in the tax bracket of 6-9 lakh are meant to pay tax at the rate of 10 percent. For income between ₹9-12 lakh, tax rate is 15 percent, 20 percent for incomes between ₹12-15 lakh and 30 percent for income above ₹15 lakh. On the top of it, standard deduction of ₹50,000 is also allowed.
However, there was an over riding provision that stated that anyone earning upto ₹7 lakh would not be entitled to pay any tax.
Marginal relief
According to marginal relief benefit, tax liability cannot exceed the additional income over and above of ₹7,00,000.
Although when a taxpayer’s income is up to ₹7 lakh, the tax liability comes out to be nil. But no sooner the income increases by ₹10 over and above of this threshold, the tax slab comes into force. For instance, when someone’s income is ₹7,00,010, his tax liability (without the marginal tax relief) would have come to ₹25,001.
Therefore, a small increase of income of ₹10 leads to an increase of tax by a whopping ₹25,001. That seemed unfair to the taxpayers falling in that income bracket.
To prevent that from happening, tax payers would stand to receive the tax rebate of upto ₹25,000 so that their tax liability does not exceed the increase in their income.
The new change will be effective starting April 1.
The government has yet not mentioned the threshold that would benefit taxpayers.
