Income Tax Calculator FY 2025-26: Old vs New Regime

Swapnil Dandekar got a raise and took home less money. Not less proportionally. Less in absolute rupees, at the end of the year, after everything.

He is 33, a senior graphic designer at a studio off Baner Road in Pune, and he is a composite — the figures below are constructed, but the trap is not. His appraisal moved him from ₹12,75,000 a year to ₹13,20,000. He mentally spent the ₹45,000 on a replacement for a five-year-old laptop. When the year’s tax was actually computed, he was ₹1,800 worse off than the colleague who had not been promoted at all.

Nobody had done anything wrong. His employer had not miscalculated. The Income Tax Department had not overcharged him. He had walked into the one place in the Indian rate structure where the marginal tax rate is above one hundred per cent, and almost nothing written about the new regime tells you where that place is.

Why a rebate behaves differently from a slab

The reason this happens is that the thing making income up to ₹12 lakh tax-free under the new regime is not a slab. It is a rebate, granted by Section 87A of the Income-tax Act, and a rebate is an all-or-nothing instrument.

A slab is gradual. Cross into a higher slab and only the rupees above the boundary attract the higher rate; the rupees below keep their old treatment. This is why the perennial worry about “jumping a slab and losing money” is normally nonsense.

A rebate is a switch. Section 87A says a resident individual whose total income does not exceed the specified figure gets a deduction from the tax otherwise payable, up to a specified ceiling. Total income of exactly the threshold: the whole tax bill is cancelled. Total income one rupee above it: the entire rebate vanishes. Not reduced by a rupee. Gone.

Do the arithmetic on that raw cliff for FY 2025-26 and it is grotesque. Taxable income of ₹12,00,000 produces ₹60,000 of slab tax, entirely wiped out by the rebate. Taxable income of ₹12,00,001 produces ₹60,000 of slab tax and no rebate at all. One extra rupee of income, ₹62,400 of extra tax once cess is added.

Parliament is aware of this, which is why a separate statutory provision exists specifically to blunt it. Marginal relief says the additional tax payable cannot exceed the amount by which your income exceeds the threshold. Earn ₹10,000 over the line and your tax before cess is capped at ₹10,000, not ₹61,500.

The number nobody publishes: where the relief band actually ends

Marginal relief is not open-ended. It applies only while the capped amount is smaller than the tax the slabs would otherwise produce. Past a certain income, the ordinary slab computation becomes the cheaper of the two and relief simply stops mattering.

That crossover point is calculable, and it is worth calculating rather than looking up, because the figure most commonly quoted online is the wrong one.

Under the FY 2025-26 new regime, taxable income above the ₹12,00,000 threshold attracts 15 per cent in the next slab. So for an excess of E rupees, slab tax is ₹60,000 plus 0.15E, while marginal relief caps the bill at E. The two are equal when 60,000 = 0.85E, which gives E = ₹70,588.

The relief band therefore runs from ₹12,00,001 of taxable income to roughly ₹12,70,588. A little over ₹70,000 wide. For a salaried person claiming the standard deduction, add it back and the band expresses itself as gross salary of roughly ₹12,75,000 to ₹13,45,588.

That second figure is why the widely repeated claim that “marginal relief runs up to ₹12.75 lakh” is a muddle of two different quantities. ₹12.75 lakh is where the band begins for a salaried taxpayer, because it is the gross salary that leaves ₹12,00,000 taxable after the standard deduction. It is not where relief ends.

The arithmetic on Swapnil’s raise

His gross went to ₹13,20,000. Standard deduction takes taxable income to ₹12,45,000, an excess of ₹45,000 over the threshold. Slab tax on that is ₹60,000 plus 15 per cent of ₹45,000, which is ₹66,750. Marginal relief caps it at ₹45,000.

Then health and education cess is applied. And this is the step every explanation of marginal relief skips: cess sits on top of the post-relief figure. Four per cent of ₹45,000 is ₹1,800, so Swapnil pays ₹46,800 on a ₹45,000 raise.

His effective marginal rate inside the relief band is not 100 per cent. It is 104 per cent. Every additional rupee earned inside that band costs him one rupee and four paise.

What nobody tells you about the band

It applies to total income, not salary. Marginal relief is computed on the aggregate figure that goes into your return. If Swapnil sits inside the band and a fixed deposit credits ₹9,000 of interest in March, that ₹9,000 is taxed at the same 104 per cent. A savings-account interest credit, a small dividend, a freelance invoice cleared on 28 March — each is worth negative money while he is inside the band. This is the only situation in Indian personal taxation where deliberately deferring a receipt into the next financial year is unambiguously rational rather than a timing gimmick.

Nobody flags it to you. The relief is applied correctly by return-filing software and by a competent payroll team, so the tax you pay is right. What no system does is tell you that you are standing in the band, or how far you would need to move to leave it. The number arrives as a computed liability, not as a warning.

Income taxed at special rates is treated separately. The 87A rebate under the new regime does not apply against tax computed at the special rates that attach to certain capital gains, so a small equity gain realised in a year when your salary sits near the threshold can behave differently from ordinary income. The interaction has been clarified more than once and the position deserves checking for the year you are actually filing rather than being assumed from an older article.

The old regime has its own version of this. Section 87A operates under both regimes with different thresholds and ceilings, so a taxpayer optimising into the old regime can land on that regime’s own cliff without realising a cliff exists there too.

What to actually do about it

Find out in December where you stand, not in June. Project your full-year total income — salary, interest, everything — before the last quarter, while the levers still work. By the time Form 16 arrives the year is closed.

If you are inside the band, the goal is to pull taxable income back under the threshold, not to shave it. Shaving is pointless: reducing taxable income from ₹12,45,000 to ₹12,30,000 saves you ₹15,600 and leaves you still inside the band. Getting below the threshold saves the whole bill.

The one lever that survives in the new regime is employer contribution to the National Pension System. Most of the familiar deductions are switched off under the new regime, but the deduction for an employer’s contribution to an employee’s NPS account is not. Restructuring part of the package into employer NPS contribution reduces taxable income without reducing total cost to the employer — which is exactly the conversation to have with a payroll team in November, and an impossible one to have in March.

Negotiate the raise, not the tax. If a proposed increment lands you inside the band, the honest thing to say to a manager is that the increase is worth nothing after tax and that a smaller one below the threshold, or a larger one above ₹13.5 lakh, is worth something. Managers with a fixed budget can sometimes do the second. They can never do it in retrospect.

Run the old regime too. A taxpayer with substantial home loan interest and a full 80C can end up below the old regime’s tax on a base small enough that the whole cliff question becomes irrelevant. There is no rule of thumb here, only the two computations side by side.

What this does not mean

It does not mean marginal relief is a defect. Without it, one rupee over the line would cost ₹62,400 rather than one rupee and four paise. The provision exists precisely because Parliament saw the cliff coming, and it does most of what it was designed to do.

It does not mean you should refuse a raise. The dead zone is roughly ₹74,000 of gross salary wide. Above it, every additional rupee is worth about 84 paise after tax, which is a perfectly ordinary marginal rate and no reason to stop earning. The trap is narrow and specific, not general.

It does not mean the numbers here are permanent. The threshold, the rebate ceiling and the slab that sits immediately above the threshold have all moved in recent Budgets, and when they move the band moves with them, sometimes changing width. What carries forward is the method: take the slab tax at the threshold, divide it by one minus the marginal rate of the slab immediately above, and that quotient is how far past the threshold the relief band extends. Run it against the current year’s figures rather than trusting last year’s answer.

And it does not mean tax should drive career decisions. Swapnil’s raise was worth taking for what it signalled about his standing at the studio, which will compound in ways ₹1,800 will not. It means only that he should have known, in November, that the number he was about to celebrate was going to arrive net of everything and slightly smaller than before.

Frequently asked questions

Is my employer supposed to apply marginal relief in my monthly TDS?

Yes — payroll computes annual tax liability on your declared income and spreads the deduction across the year, and a correctly configured system applies the rebate and the relief in that computation. What it will not do is alert you that you are inside the band, or model what a bonus in February would do to it. That projection is yours to run.

Does a bonus paid in March get caught by this?

It is taxed as income of the year in which it is due or paid, so a March bonus that pushes total income from below the threshold into the relief band is taxed at the band’s effective rate. Where the timing of a variable payout is genuinely discretionary and you are close to the line, the question is worth raising with payroll before the payout is processed rather than after.

Does the rebate apply to non-residents?

No. Section 87A is available to resident individuals only, so a non-resident with the same total income is taxed on the ordinary slabs with no rebate and therefore no cliff and no relief band. This is one of the few places where residential status changes the shape of the computation rather than just the numbers in it.

If I am inside the band, is it worth making an investment purely to get below the threshold?

Only if the deduction is actually available under the regime you are in. Most of the classic deductions are switched off in the new regime, so an ELSS purchase made in March to “get under the line” achieves nothing there. The deduction for an employer’s NPS contribution is the main survivor, and it needs to be built into the salary structure in advance rather than bought at the end of the year.

Why is the effective rate 104 per cent and not 100 per cent?

Because health and education cess is levied at four per cent on the tax figure arrived at after the rebate and after marginal relief, not before. Marginal relief caps the tax at the excess income; the cess is then charged on that capped tax and is not itself capped. The result is that the total charge slightly exceeds the extra income that triggered it.

Statutory basis: Section 87A of the Income-tax Act sets out the rebate for resident individuals and the ceiling on it; the accompanying marginal relief provision caps the incremental tax at the excess of total income over the threshold; health and education cess is levied on the tax computed after rebate and relief. The current thresholds, rebate ceiling and slab rates are published by the Income Tax Department at incometaxindia.gov.in and change with each Finance Act. The derivation of the relief band’s upper edge, the ₹74,000 dead-zone width, the 104 per cent effective marginal rate and the character of Swapnil Dandekar are this article’s own analysis.

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Disclaimer: This article is for general information only and is not financial or tax advice. “Swapnil Dandekar” is a composite character, not a real individual, and all figures are illustrative and specific to one assessment year’s rates. Thresholds and slabs change with every Finance Act — verify the current position before acting. Consult a qualified tax advisor for your own return.