Standard Deduction, Section 87A Rebate and Marginal Relief — Explained

Standard deduction, the Section 87A rebate, and marginal relief get lumped together in everyday conversation, but they do three completely different jobs at three completely different points in a tax calculation. Mixing them up is how people end up with wrong estimates of their own tax bill — or miss a rebate they actually qualify for.

Standard deduction reduces your taxable income before any slab rate is applied. The 87A rebate wipes out tax after slab rates have already been applied. Marginal relief is a safety net that kicks in only near certain thresholds, to stop small increases in income from causing disproportionately large jumps in tax. Understanding the order — deduction, then slabs, then rebate, then relief if needed — is the key to understanding all three.

The standard deduction is a fixed amount subtracted directly from gross salary or pension income, before any other calculation happens. It requires no bills, no proof, no investment — it simply applies automatically to anyone earning salary or pension income. Under the new regime it is ₹75,000 a year; under the old regime it is ₹50,000 a year.

One important limit: it is only available against salary and pension income. If your income comes purely from business, professional fees, or capital gains with no salary component, the standard deduction does not apply to that income at all — it is strictly a salaried-and-pensioner benefit.

Because it needs no paperwork and applies before slabs are even touched, it is the simplest form of tax relief in the entire system — and one of the reasons the new regime, with its larger ₹75,000 figure, has become so competitive even for people with few other deductions.

A common misunderstanding is treating the 87A rebate threshold as if it were just another tax-free slab. It is not. The tax on your income is first fully calculated using the applicable slab rates, exactly as it would be for anyone else. Only after that number is arrived at does Section 87A step in and waive it entirely — but only if your total taxable income falls at or below the eligible threshold.

Under the new regime, that threshold is taxable income up to ₹12,00,000, with the rebate capped at ₹60,000. Under the old regime, the threshold is much lower — taxable income up to ₹5,00,000, with the rebate capped at ₹12,500. In both cases, if your taxable income is even one rupee above the threshold, you calculate tax normally on your full income; the rebate simply does not apply, subject to the marginal relief discussed below.

This distinction matters because it explains why two people with taxable income of, say, ₹11,50,000 and ₹12,50,000 under the new regime can have wildly different outcomes — one pays no tax at all, while the other pays tax on the full slab-computed amount (before any marginal relief adjustment).

Any system built on hard thresholds runs into an awkward edge case: what happens to the person who lands just barely on the wrong side of the line? Without a fix, someone earning ₹1 more than a rebate or surcharge threshold could end up with dramatically lower take-home income than someone earning ₹1 less — an outcome that feels unfair and creates a strange incentive to avoid earning that extra rupee at all.

Marginal relief exists specifically to prevent that. The underlying idea, wherever it applies, is that the extra tax (or extra surcharge) a taxpayer pays for crossing a threshold is capped at the amount of income by which they crossed it. In other words, you can never end up worse off in take-home terms than someone who earned less than you and stayed just under the line.

It is important to understand that marginal relief does not apply everywhere a threshold exists in Indian tax law — it applies specifically where the law provides for it, which today means the new-regime 87A rebate threshold and every surcharge threshold in both regimes. The old-regime 87A threshold, notably, is not one of them — more on that below.

Under the new regime, someone whose taxable income sits just above ₹12,00,000 would, without any adjustment, suddenly owe slab-computed tax on their full income while someone earning slightly less pays nothing at all. Marginal relief smooths this out: it caps the extra tax owed by someone just above the threshold at roughly the amount by which their income exceeds ₹12,00,000, so crossing the line by a small amount never wipes out more take-home income than the raise itself provided.

The practical effect is a short band just above ₹12,00,000 where tax rises gradually rather than jumping straight to the full slab-computed figure. Once income rises further past this band, the relief tapers off and normal slab tax applies in full.

Now contrast this with the old regime. There, the ₹5,00,000 rebate threshold has no such cushion built in. Someone with taxable income of ₹5,00,000 pays zero tax; someone with taxable income of ₹5,00,001 loses the rebate entirely and owes tax on their full income calculated normally through the slabs — a genuine cliff, not a gentle slope. This is a well-known trap that catches taxpayers who assume the old regime works the same way as the new one.

Surcharge is an extra charge on the income-tax amount itself (calculated before the 4% health and education cess), which kicks in only for higher income levels. It exists in both the old and new regimes, and both provide marginal relief at every threshold, for exactly the same reason as above — to stop a small rise in income from triggering a surcharge bill that shrinks take-home income below what someone just under the threshold keeps.

The thresholds and rates are identical between the two regimes up to ₹2 crore of total income, and diverge only at the very top end, where the new regime caps its maximum surcharge rate lower than the old regime does.

For a salaried taxpayer, the full sequence runs like this: start with gross salary, subtract the standard deduction to get taxable income, apply the applicable slab rates to compute tax, then check whether the 87A rebate wipes that tax out entirely, then — for higher incomes — add surcharge if a threshold is crossed, checking marginal relief at that step too, and finally add 4% health and education cess on top of tax plus surcharge.

Each of these three concepts operates independently, at its own point in that sequence. Confusing them — for instance, assuming the old regime's 87A threshold behaves like the new regime's, or assuming marginal relief applies to every threshold in the tax code — is one of the most common ways taxpayers misjudge their own liability.

Working through standard deduction, slab tax, the 87A rebate, surcharge and marginal relief by hand is exactly the kind of multi-step calculation that is easy to get slightly wrong. Our Income Tax Calculator applies all of this automatically, for both regimes, using your actual income details — so you see your real final liability without doing the sequence yourself.