Income Tax Calculations: Is your annual income Rs 12,95,000? Will you be taxed on Rs 20,000, or Rs 12,95,000?

New Tax Regime Tax Calculations: The financial year 2024-25 will end in a few days.

The taxpayers can file their income tax return (ITR) under the old and the new tax regimes.

However, for the next financial year (2025-26), they can file their ITR under the proposed new tax regime, which was introduced by Finance Minister Nirmala Sitharaman in her Budget 2025 speech.

Under the proposed new tax regime, you don't have to pay tax on an annual income up to Rs 12,75,000 if you are a salaried-class individual.

Beyond that, you will be taxed!

But how much? What will happen if your income is higher by Rs 20,000?

Will you pay tax on just Rs 20,000 or the entire income?

How much will be the tax?

Tax slabs in proposed new tax regime

The proposed new tax slab will reduce the tax liability to quite a few notches as the 15 per cent tax slab starts from Rs 12,00,000, 20 per cent from Rs 16,00,000, and 30 per cent from Rs 24,00,000.

In the existing new tax regime, the 15 per cent slabs start from Rs 10,00,000, while 30 per cent from Rs 15 lakh.

Tax-free income

Annual income of up to Rs 12,00,000 is tax-free for non-salaried class individuals, while salaried-class individuals will get an extra relaxation of Rs 75,000.

Why tax-free limit is higher for salaried-class individuals

This is because a standard deduction of Rs 75,000 under Section 87A is available only to salaried-class individuals.

How Rs 12,75,000 income becomes tax-free

First, the Rs 75,00,000 deduction reduces the taxable income to Rs 12,00,000.

On this amount, the tax as per the proposed new regime slabs is Rs 60,000, but the taxpayer gets a rebate of Rs 60,000 under Section 87A, so the income becomes tax-free.

Tax if income increases by Re 1

Now, here comes the catch, what if a salaried-class individual's annual income is Rs 12,75,001? Will this Re 1 extra force them to pay tax on the entire income? Here comes the concept of marginal relief to their rescue.

What is marginal relief?

The rule of marginal relief says that if the income of a taxpayer increases slightly over the tax-free limit, they don't need to pay the tax more than the incremental income.

For example, if one earns Rs 12,80,000, after a standard deduction of Rs 75,000, tax liability on the income will be Rs 60,780 (including 4 per cent education cess).

But with marginal relief, it will be Rs 5,200 (where Rs 5,000 is the income over Rs 12,75,000, and Rs 200 is 4 per cent of Rs 5,000).

When will there be no marginal relief?

Suppose a person is earning Rs 13,50,000 a year.

After the standard deduction, the taxable income will be Rs 12,75,000.

Here the incremental income is Rs 75,000.

But as per tax slabs, the tax is Rs 74,100. So, the taxpayer will pay Rs 74,100 as tax instead of Rs 75,000 plus 4 per cent education cess.

Income tax on Rs 12,95,000

In this case, the taxable income is Rs 20,000 after the standard deduction. So, the total tax liability will be Rs 20,800 (Rs 20,000 plus 4 per cent of Rs 20,000).