Many new changes were introduced in the new tax regime in budget 2023, after which it may become a beneficial regime for many. Notably, two significant adjustments have been made: firstly, you now benefit from a standard deduction of ₹50,000, and secondly, the rebate is now applicable up to an income of ₹7 lakhs. Hence, after these changes, you can enjoy tax-free income of up to ₹7.5L.
The standard deduction of ₹50,000 is only applicable in the case of salary income.
Now, what would happen if your income went up to say, ₹7.6L?
So, according to the slabs under the new regime, on an income of ₹7.6L, the tax liability will be calculated as follows:
| Total income | ₹7,60,000 |
|---|---|
| Standard deduction | ₹50,000 |
| Taxable income | ₹7,10,000 |
| Tax on income up to ₹3 lakh | - |
| Tax on income between ₹3lakh-₹6 lakh (5%) | ₹15,000 |
| Tax on income between ₹6 lakh-₹9 lakh (10%) | ₹11,000 |
| Total tax including Cess (4% of tax payable) | ₹27,040 |
This means one has to pay no tax if their income is until ₹7.5L, but, as soon as income increases a little over that, the tax liability becomes more than the income that was earned over ₹7.5L. This means to earn just an extra ₹10,000, one will have to pay ₹27,000 in taxes.
This creates a paradox situation and hence, marginal relief was introduced.
As per the marginal tax relief, the amount of tax one needs to pay on income over ₹7.5L is the additional income above ₹7.5 lakh and not the tax liability as per the slabs. Hence, in our example, the tax liability of the person earning ₹7.6L becomes ₹10,000 and not ₹27,000.
The below table will help you understand better.
However, once the income exceeds ₹7,77,778, the tax liability is lesser than the income earned over ₹7.5L and hence, this is where the breakeven happens. So, for any income above this, tax on slab rate will be applicable.
It is also important to note that the marginal relief is only available if you are opting for the new tax regime and that too from FY 23-24 onwards.