Marginal Relief

Slab rates are gradual. Cross into a higher slab and only the income above the slab boundary is taxed at the higher rate, so an extra rupee of income never produces more than a fraction of a rupee of extra tax.

Surcharge does not work that way. It is a percentage of the tax, and it switches on at a threshold of total income. Cross the threshold by one rupee and surcharge applies to the whole of the tax, not to the tax on the last rupee. Without a correction, someone earning slightly above a threshold takes home less than someone earning slightly below it.

The same cliff appears wherever a rebate is withdrawn in one step rather than tapered. Income at the threshold attracts no tax because the rebate cancels it. Income one rupee higher loses the rebate entirely and attracts tax on the whole amount above the exemption limit.

Marginal relief is the correction for both. It caps the additional tax at the additional income, so crossing a threshold can never leave someone worse off than staying below it.

The computation is a comparison, and it is easier to hold on to as a sequence than as a formula.

• Compute tax, including surcharge, on the actual total income.
• Compute tax on income exactly at the threshold, without the surcharge that the threshold triggers.
• Take the difference between those two tax figures. That is the additional tax.
• Take the difference between the actual income and the threshold. That is the additional income.
• If the additional tax exceeds the additional income, the excess is the relief and is deducted from the surcharge.

Two details decide whether the answer is right.

First, the relief reduces the surcharge, not the tax before surcharge. Where the relief is larger than the surcharge itself the surcharge falls to nil and no further reduction is made.

Second, cess is computed on tax plus surcharge after relief, not before. Applying cess first and then relieving overstates the relief.

The comparison is run separately at each threshold, and only the threshold immediately below the actual income is relevant. Someone well above a threshold gets no relief at it, because their additional tax is a small fraction of their additional income. The relief runs out naturally a little way above each threshold, which is why it is described as marginal.

At two kinds of threshold, and it is worth separating them because they behave differently.

The rates, the income thresholds and the highest surcharge rate applicable to each regime have all been changed by successive Finance Acts, and the rebate threshold has been raised more than once. Confirm every figure against the Finance Act for the year you are computing rather than the year you learned them.

There is also a company-side version of the same idea at the thresholds where surcharge applies to corporate income. The principle is identical, the thresholds are not, and it is not a payroll matter.

Salary deduction is computed on projected annual income, not on what has been paid so far. So the moment payroll projects an employee across a threshold, the deduction for the remaining months has to reflect both the surcharge and the relief that goes with it.

This is where the practical problems live.

• A bonus or a long term incentive paid mid-year can push a projection past a threshold in a single month. If the system applies surcharge but not relief, the employee sees a deduction far larger than the payment justified, in the month they were expecting the opposite.
• An employee who joins mid-year brings previous salary with them, and the projection has to include it. Ignoring it understates the projection and misses the threshold entirely until March, when the whole correction lands in one month.
• Perquisite valuations settled late in the year move total income after most of the deduction has already been made, so a threshold can be crossed in February with two months left to collect the difference.
• A regime change by the employee changes which thresholds and which rebate apply, and therefore whether relief arises at all.

None of this is discretionary. The employer is required to deduct the correct amount, and an employee who was over-deducted because relief was not applied has had money withheld they were entitled to keep until they file.

Marginal relief is one of the more reliably mishandled parts of salary tax, and the errors are consistent.

• Relief not applied at all, so an employee just above a threshold is deducted as though the surcharge applied in full. This is the most common, and it is invisible until someone compares two colleagues' payslips.
• Cess computed before relief rather than after, which produces a figure that is close enough to look right and is wrong in the employee's favour.
• Relief computed against the wrong threshold, usually the lowest one rather than the one immediately below the income.
• Relief applied to the basic tax rather than to the surcharge, which produces a much larger reduction than the provision allows.
• Relief computed once in March instead of being reflected in the monthly deduction, so the employee is over-deducted for eleven months and under-deducted in the twelfth.

The check that catches most of these is simple enough to run by hand. Take the employee's income, take the threshold immediately below it, and confirm that the extra tax is not larger than the extra income. If it is, the relief has not been applied.

The Finance Act, 2026 does something worth understanding before looking up a rate: it charges two regimes in parallel, because the transition between the Acts is not complete.

Section 2 charges income-tax for the assessment year commencing 1 April 2026 under the Income-tax Act, 1961, at the rates in Part I-A of the First Schedule. Section 3 charges income-tax for the tax year commencing 1 April 2026 under the Income-tax Act, 2025, at the rates in Part I-B. Both are in the same Act, and which one applies depends on which regime the income falls in. Reading a rate out of the wrong Part is the easiest mistake available here.

The marginal relief mechanism itself is a ceiling rather than a rebate, and the Finance Act states it as a formula. For the persons and thresholds in the relevant table, the total amount payable as income-tax and surcharge shall not exceed To, where To = Ro + So; Ro is the tax and surcharge payable on the threshold amount in column C, and So is the amount by which total income exceeds that threshold. In plain terms: once you cross a surcharge threshold, the extra tax cannot exceed the extra income. The thresholds in the table read fifty lakh, one crore, two crore and five crore rupees.

That formula and those thresholds were read from the limb charging under the 1961 Act. The corresponding provision in the limb charging under the 2025 Act was not located in this pass, so the figures above should not be assumed to carry across to the 2025 regime without checking Part I-B and the section 3 sub-sections.