In the new tax system, by getting rebate on income up to Rs 12 lakh, the tax becomes zero. But as soon as the income goes even slightly above this limit, tax calculation starts. This is where confusion arises for many salaried people, especially when the tax seems to be higher after a nominal salary increase.
Rs 13.4 lakh vs Rs 13.5 lakh: Small difference, big impact
If the salary of two people is Rs 13.4 lakh and Rs 13.5 lakh, then the difference is only Rs 10,000. But due to tax calculation, the tax liability of both becomes different. After standard deduction of Rs 75,000, the taxable income of Rs 13.4 lakh comes to Rs 12.65 lakh and that of Rs 13.5 lakh comes to Rs 12.75 lakh.
According to the current tax slab, there is 0% tax up to Rs 4 lakh, 5% on Rs 48 lakh, 10% on Rs 812 lakh and 15% above Rs 12 lakh. According to this, the tax on Rs 13.4 lakh is Rs 69,750 and on Rs 13.5 lakh it is Rs 71,250.
What is marginal relief and when is it available?
Marginal relief is a relief that is available when your tax liability exceeds your additional income above Rs 12 lakh. Its purpose is to ensure that you do not have to pay more tax than your additional income.
In the case of Rs 13.4 lakh, your additional income above Rs 12 lakh is Rs 65,000, but the tax being paid is Rs 69,750. In such a situation, the government limits the tax to Rs 65,000 and you get a relief of Rs 4,750.
Why is there no benefit on Rs 13.5 lakh?
On a salary of Rs 13.5 lakh, your additional income is Rs 75,000, while the tax comes to Rs 71,250. Here your additional earnings are more than the tax, hence marginal relief is not applicable and you have to pay the full tax.
Safety net for the middle class
According to tax experts, marginal relief is a kind of security shield, which protects middle income people from sudden increased tax burden. However, as income increases, this relief gradually disappears. It is clear from this example that even a small salary increase can have a big impact on tax. Therefore, while tax planning, it is very important to understand not only the income but also the rules of tax slab and marginal relief.