Here’s Demystifying Marginal Tax Relief And ‘Rs 7.27 Lakh Exemption’

Union Minister of Finance Nirmala Sitharaman’s recent announcement regarding tax exemption of up to Rs 7.27 lakh has sparked confusion among taxpayers. Here we clarify the concept of marginal tax relief and its implications on an individual’s tax liability
 Here’s Demystifying Marginal Tax Relief And ‘Rs 7.27 Lakh Exemption’

Union Minister of Finance Nirmala Sitharaman said on July 14, 2023 that an income of Rs 7.27 lakh is the break-even point beyond which taxpayers will have to pay tax for every additional rupee earned.

“So, we sat as a team and went into the details (to find out) at what stage you pay tax for every additional Re. 1 that you earn... (for instance) for Rs 7.27 lakh, you don’t pay any tax now. It is only at Rs. 27,000 that the break-even comes. After that, you start paying tax,” she said.

To comprehend the confusion caused by these figures, it is crucial to understand the concept of marginal tax relief. In her Budget Speech in February 2023, Sitharaman introduced marginal tax relief to prevent situations where a slight increase in income results in disproportionately higher tax payments. Although she approximated the figure as Rs 7.27 lakh, the precise amount is Rs 7,27,778. 

Says Mukesh Gupta, chartered accountant and certified financial planner: “The marginal tax relief is designed to provide tax relief to individuals, especially those in the lower income brackets. By opting for the new tax regime, individuals can take advantage of these lower tax rates and potentially reduce their overall tax liability.”

It is designed to basically avoid the tax burden, which is more than income itself, he adds.

Marginal tax relief applies to small income taxpayers with taxable incomes exceeding Rs 7 lakh (Rs 7.5 lakh less the standard deduction of Rs 50,000). It comes into effect when a marginal increase in income beyond Rs 7 lakh leads to significantly higher tax payments. Tax New Regime

How Marginal Relief Works?

Let’s delve into the calculation to understand how marginal tax relief affects tax liabilities. Consider an individual with a total income of Rs 7.60 lakh. After deducting the standard deduction of Rs 50,000, the taxable income comes to Rs 7.10 lakh.

According to the existing income tax slabs, there is no tax liability for incomes up to Rs 3 lakh. For incomes between Rs 3 lakh and Rs 6 lakh, the tax rate is 5 per cent, resulting in a tax amount of Rs 15,000 (5 per cent of Rs. 3 lakh).

Further, incomes between Rs. 6 lakh and Rs. 9 lakh attract a tax rate of 10 per cent, equating to a tax amount of Rs. 11,000 (10 per cent of Rs. 1.10 lakh). Consequently, the total tax liability excluding cess comes to Rs. 26,000 (Rs. 15,000 plus Rs. 11,000). Here for just earning Rs. 10,000 extra, the taxpayer ends up paying Rs. 26,000 in tax.

This is where marginal tax relief helps. The taxpayer now has to pay the amount he earned above Rs. 7 lakh, i.e., Rs. 10,000. Thus, their tax liability would be Rs. 10,000 instead of Rs. 26,000. This results in a marginal relief of Rs. 16,000 (Rs. 26,000 less Rs. 10,000).

Now, the break-even point Sitharaman mentioned is the threshold at which the actual tax liability matches the slab-based tax liability. This figure is Rs. 7,27,778 (Rs. 7,77,778 minus Rs. 50,000 as the standard deduction) as beyond this point, the actual tax liability surpasses the slab-based tax liability. 

For instance, readers can use the same method of calculation used above and see that if one were to earn Rs. 7.28 lakh, the actual tax liability would be Rs. 28,000, which is more than the calculated slab-based liability of Rs. 27,800.

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