New Tax Regime Calculations: Is your salary Rs 12,89,000? Do you have to pay tax on Rs 12,89,000 or Rs 14,000?

Marginal Tax Relief Explained: The concept of marginal tax relief is old. It applies when your income is slightly higher than the tax-free income limit. It allows you to pay tax only equal to the incremental income. But how does it apply? Who benefits from it? What will be its significance for the financial year 2025-26?

The tax-free income limit in the revised new tax regime tax slab is Rs 12,75,000, but what if you earn Rs 12,89,000 in FY 25-26?

Will you be taxed on your entire income or just the incremental income of Rs 14,000?

See calculations to have a clear idea.

New tax regime slabs for FY 2526   

In Budget 2025, Finance Minister Nirmala Sitharaman revised income tax slabs for the new tax regime.

These slabs will be applicable for the income earned in FY 25-26. There is a nil tax on an income up to Rs 4,00,000.

After that the 5 per cent slab starts, which goes up to 30 per cent on a Rs 24 lakh income.

The tax-free income limit is Rs 12 lakh for non-salaried individuals and Rs 12,75,000 for salaried-class individuals. What does it actually mean?

Rebate on income  

As you can see in the table, there is a nil tax on income up to Rs 4 lakh, so how come Rs 12 lakh income is tax-free?

On an Rs 12 lakh income, the total income tax as per slabs is Rs 60,000. But under Section 87A of the Income Tax Act, 1961, the maximum tax rebate applicable is Rs 60,000. So a Rs 12 lakh income becomes tax-free. 

Standard deduction

Salaried individuals get a further Rs 75,000 tax benefit in the form of a standard deduction, so their income up to Rs 12,75,000 becomes tax-free. Beyond that marginal tax relief will apply. 

Marginal tax relief  

As per marginal tax relief, if your income exceeds Rs 12 lakh by a small margin, your tax will not be more than the incremental income.

Marginal tax relief will apply on income till Rs 12,75,000 (excluding marginal tax relief for salaried individuals).

E.g., if your income is Rs 12,20,000, you don't have to tax on the entire income, but it will be Rs 20,000 (the incremental income) plus 4 per cent of Rs 20,000 as education cess.

But if your income is Rs 12,75,000, your incremental income is Rs 75,000, but your tax will be Rs 71,250 as per slabs. In such a case, you will pay Rs 71,250 as tax and not Rs 75,000. 
  

What will be tax on Rs 12,89,000 salary?

Since we are taking the example of a salaried-class individual, a standard deduction of Rs 75,000 will apply. After which, the taxable income will be Rs 12,14,000. 

In this case, the tax as per slabs will be Rs 62,100, but the incremental income is Rs 14,000. So the total tax will be Rs 14,000+4 per cent of Rs 14,000= Rs 14,560.