Understanding Marginal Tax Relief in the New Tax Regime ???

The marginal tax relief introduced in the Union Budget for FY24 is a game-changer for individuals whose income slightly exceeds ?7.75 lakh. Let’s break it down in an engaging way! ??

How Does the New Tax Regime Work? ??

In the new tax regime, individuals can enjoy some fantastic benefits:

• A standard deduction of ?75,000! ??
• No tax on income up to ?7 lakh. ??

Let’s Meet Person A

Imagine Person A earns ?7.75 lakh. Here’s how their taxable income looks:

• Total Income: ?7,75,000
• Standard Deduction: ?75,000
• Taxable Income: ?7,00,000
• Tax Liability: ?20,000
• Tax Rebate: ?20,000
• Final Tax Payable: ?0! ????

So, Person A pays no tax—woohoo! ??

What Happens If You Earn Just a Little More? ??

Now, let’s say another individual, Person B, earns ?7.76 lakh (just ?1,000 more). Here’s where it gets interesting:

• Total Income: ?7,76,000
• Standard Deduction: ?75,000
• Taxable Income: ?7,01,000

The tax breakdown is as follows:

• Tax on income up to ?3 lakh: ?0
• Tax on income between ?3 lakh and ?7 lakh: ?20,000
• Tax on income between ?7 lakh and ?10 lakh: ?100

So, Person B’s total tax comes to ?20,100. ?? That means for earning just ?1,000 more, they pay ?19,100 more in tax compared to Person A!

How Marginal Tax Relief Helps ??

Here’s the magic of marginal tax relief: for anyone earning between ?7,75,001 and ?7,97,222, their tax is calculated based on just the extra income, not the whole structure. So for Person B, instead of paying ?20,100, they only pay ?1,000. ??

Examples of Tax Calculation with Marginal Relief ??

Here’s a summary of how marginal relief works for different incomes:

What About Higher Incomes? ??

If someone earns more than ?7,97,222, they start paying tax based on the standard slabs, which could be lower than the calculated tax using the ?7 lakh threshold. For example, if someone earns ?8 lakh:

• Their tax would be ?22,500 based on the slabs, which is lower than the higher tax calculation.

Conclusion ??

Marginal tax relief makes the new tax regime super appealing for those whose income is just above ?7.75 lakh. Without this relief, a small increase in income could lead to a hefty tax bill, effectively negating the benefit of that increase. ??

Understanding these nuances can help you navigate your finances more effectively—after all, a little knowledge goes a long way! ????