The tax system is progressive in nature i.e., as the income increases, tax also increases.
Assessees having higher income than the prescribed limit are required to pay extra amount of tax in the form of Surcharge. Different threshold limits have been prescribed based on the total income and the type of assessees. For instance, if the assessee is an individual and his total income exceeds ₹50 lakhs, surcharge is leviable @10%. While if the same individual earns more than ₹1 crore but less than ₹2 crore, the surcharge is leviable@15%. In case of even a small increase in the total income of an assessee beyond threshold limit, surcharge would be applicable on the income-tax on total income. Hence, marginal relief has been provided in such cases.
There is no marginal relief in case of Section 87A. A person earning slightly more than ₹5.01 Lakhs would end up with lower take-home than someone earning ₹4.99 Lakhs (now this has become ₹7 Lakhs w.e.f AY2024-25)
Example of Marginal Relief:
According to the Income-tax provisions, a marginal relief will be provided to certain taxpayers up to the amount of the difference between the excess tax payable (including surcharge) on the income above Rs.50 lakhs and the amount of income that exceeds Rs.50 Lakhs.
Suppose, an individual has a total income of Rs.51 Lakhs in a FY 2020-21.
He will have to pay taxes inclusive of a surcharge of 10% on the tax computed i.e., total tax payable will be Rs. 14,76, 750.
But, if he would have earned only Rs.50 lakhs, then the tax liability would have been Rs.13,12,500 only(excluding cess).
Isn’t it unfair for the individual? For earning an extra Rs.1,00,000, he will end up paying income tax of Rs.1,64,250. The individual’s tax liability should be reduced to avoid any such excess tax payable.
The individual will get a marginal relief of the difference amount between the excess tax payable on higher income i.e (Rs.14,76, 750 minus Rs.13,12,500 = Rs.1,64,250 ) and the amount of income that exceeds Rs. 50 Lakhs i.e. (Rs.51,00,000 minus Rs.50,00,000 = Rs.1,00,000).
The marginal relief will be Rs.64,250 (Rs.1,64,250 minus Rs.1,00,000).
Hence, income tax liability on income of Rs. 51,00,000 will be Rs.14,12,500.
Suppose, an individual has a total income of Rs.51 Lakhs in a FY 2020-21.
He will have to pay taxes inclusive of a surcharge of 10% on the tax computed i.e., total tax payable will be Rs. 14,76, 750.
But, if he would have earned only Rs.50 lakhs, then the tax liability would have been Rs.13,12,500 only(excluding cess).
Isn’t it unfair for the individual? For earning an extra Rs.1,00,000, he will end up paying income tax of Rs.1,64,250. The individual’s tax liability should be reduced to avoid any such excess tax payable.
The individual will get a marginal relief of the difference amount between the excess tax payable on higher income i.e (Rs.14,76, 750 minus Rs.13,12,500 = Rs.1,64,250 ) and the amount of income that exceeds Rs. 50 Lakhs i.e. (Rs.51,00,000 minus Rs.50,00,000 = Rs.1,00,000).
The marginal relief will be Rs.64,250 (Rs.1,64,250 minus Rs.1,00,000).
Hence, income tax liability on income of Rs. 51,00,000 will be Rs.14,12,500.
