Marginal Tax Relief Under New Regime: Pay Re. 1 As Tax If Income Exceeds Rs 7 Lakh Limit By Re. 1 

In Budget 2023, the government raised the threshold limit for total income eligible for rebate under the new tax regime from Rs. 5 lakh to Rs. 7 lakh. The government also raised the tax exemption limit under the new tax regime from Rs. 2.5 lakh to Rs. 3 lakh. 

What it effectively meant for the small income taxpayers was that their tax liability would be nil if their total taxable income was Rs. 7 lakh, but would increase by Rs. 25,000 if their income exceeded the Rs. 7 lakh limit by even a single rupee. 

The income tax would be calculated on Rs 4,00,001 remaining after taking into account the Rs. 3 lakh available as exemption, at the applicable slabs of 5 and 10 per cent, respectively. 

The tax rate would be calculated on at 5 per cent on income between Rs. 3 lakh and Rs. 6 lakh, 10 per cent on income between Rs. 6 lakh and Rs. 7 lakh, thus coming to Rs. 25,000. 

The Relief 

Now, the government has brought a relief to the small income taxpayers by way of an amendment to Section 87A in the Finance Bill 2023. 

In the above-mentioned example, previously, if the total taxable income was Rs 7,00,001, the tax payable would come to Rs 25,000 based on slab rates in the new tax regimes. The additional income of Re. 1 would entail a tax liability of Rs. 25,000. 

But now, after the amendment, which will come into effect from April 1, 2023, the taxpayer will have to pay a tax of only Re. 1 if the taxable income comes to Rs 7,00,001. 

Previously, for a total taxable income of Rs 7.10 lakh, the taxpayer had to pay Rs 26,000, but now after the marginal relief, he will have to pay a tax of only Rs 10,000. 

The marginal benefit will hold true only up to income less than Rs 7.5 lakh. Where taxable income comes to Rs 7.5 lakh, the tax amount, even after considering marginal relief, comes to Rs. 30,000, thus effectively negating the benefit of marginal relief under the new amendment.