The Marginal Tax Rate is the tax applied to the last rupee of income earned. It follows a progressive system where income is taxed in slabs. The Marginal Tax Rate helps in equitable taxation and efficient tax planning for individuals and businesses.
Marginal tax rates in India
India uses a progressive tax system where the marginal tax rate increases with income. The rates are structured into slabs, and as income rises, the portion falling in the higher slab is taxed at a higher rate.
Here are the income tax slabs for FY 2024–25 under the new regime:
- Up to Rs. 3,00,000: Nil
- Rs. 3,00,001 to Rs. 7,00,000: 5%
- Rs. 7,00,001 to Rs. 10,00,000: 10%
- Rs. 10,00,001 to Rs. 12,00,000: 15%
- Rs. 12,00,001 to Rs. 15,00,000: 20%
- Above Rs. 15,00,000: 30%
This tiered system ensures that as your income increases, the marginal tax rate applicable to the next slab also increases, promoting fair and proportionate taxation.
What is the maximum marginal tax rate
The maximum marginal tax rate is the highest rate applied to the last portion of a taxpayer's income. Under the new tax regime for FY 2025-26, this rate is 30% for incomes exceeding Rs. 24,00,000. However, additional charges like surcharges and cess can increase the effective tax rate. For instance, individuals earning above Rs. 1 crore are subject to a surcharge, elevating their effective tax rate beyond the standard 30%.
For corporate entities, the marginal tax rate varies. As of 2020, domestic companies faced a marginal tax rate of 25.17%, inclusive of surcharges and cess. These rates are subject to change based on government policies and fiscal measures.
How to calculate marginal tax rate?
Calculating your marginal tax rate is simple if you're aware of the income tax slabs. Here’s how you can do it:
- Find your total taxable income: Include all sources such as salary, business income, interest, rent, etc.
- Identify your tax slab: Check which tax bracket your total income falls into based on the latest slab rates.
- Isolate the incremental income: Marginal tax rate is applicable only on the portion of income that enters a higher slab. For instance, if your income increases from Rs. 5,00,000 to Rs. 5,50,000, the marginal rate applies only to Rs. 50,000.
- Apply the slab rate: Use the applicable tax rate for your slab to calculate tax on the incremental amount. For Rs. 50,000 falling in the 5% slab, you’ll pay Rs. 2,500 as marginal tax.
This method helps you estimate how much additional tax you pay as your income increases.
How to calculate marginal tax rate?
Calculating your marginal tax rate is simple if you're aware of the income tax slabs. Here’s how you can do it:
- Find your total taxable income: Include all sources such as salary, business income, interest, rent, etc.
- Identify your tax slab: Check which tax bracket your total income falls into based on the latest slab rates.
- Isolate the incremental income: Marginal tax rate is applicable only on the portion of income that enters a higher slab. For instance, if your income increases from Rs. 5,00,000 to Rs. 5,50,000, the marginal rate applies only to Rs. 50,000.
- Apply the slab rate: Use the applicable tax rate for your slab to calculate tax on the incremental amount. For Rs. 50,000 falling in the 5% slab, you’ll pay Rs. 2,500 as marginal tax.
This method helps you estimate how much additional tax you pay as your income increases.
Marginal Tax Rate Example
For an individual earning Rs. 6 crore, the taxation breakdown is:
Base tax (30%) = Rs. 1.8 crore
Surcharge (37%) = Rs. 66.6 lakh
Cess (4%) on tax + surcharge = Rs. 7.86 lakh
Total tax liability = Rs. 2.54 crore (Effective MMTR: 42.74%)
The MMTR significantly impacts high-net-worth individuals (HNWIs) and businesses, influencing tax-saving strategies like investments in tax-exempt instruments.
Read also: Taxation Meaning
Importance of marginal tax rate
Understanding your marginal tax rate plays a key role in managing your finances effectively. Here's why it matters:
- Tax planning: Being aware of your marginal rate helps you manage your income to avoid entering a higher tax bracket, allowing better control over your tax outflow.
- Investment choices: Since some returns are taxed based on your marginal rate, it directly impacts your post-tax gains and influences where and how you invest.
- Salary and bonuses: Knowing your marginal tax rate helps in making informed decisions during salary negotiations, especially when bonuses or raises could move you into a higher tax slab.
- Tax optimisation: With a clear picture of your marginal rate, you can strategically claim deductions, exemptions, and rebates to reduce your overall tax liability.
Conclusion
The marginal tax rate is a key aspect of India’s progressive tax system, ensuring that higher incomes are taxed at higher rates. It helps maintain fair taxation, encourages strategic financial planning, and supports government revenue generation.
For individuals and businesses, understanding marginal tax rates is crucial for optimising tax liabilities. By choosing the right tax regime—old or new—and leveraging deductions like Public Provident Fund (PPF), taxpayers can reduce their effective tax burden.
For high-income earners, the maximum marginal tax rate (MMTR), including surcharges and cess, significantly impacts overall tax payments. Strategic tax planning through tax-saving investments and exemptions is essential to mitigate tax liability.
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