Effective Tax Rate

The tax rate is the portion of income or money paid to the government as tax, expressed as a percentage. Know about effective tax rate and how it’s calculated.
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4 min
10-November-2025

When it comes to paying taxes, terms like effective tax rate and marginal tax rate often confuse people. You might hear one rate in the news but end up paying another. The reason lies in how these rates are calculated and applied to your income.

This article simplifies both concepts so you can understand how much tax you truly pay — and how to manage your income more efficiently through smart financial planning.

While you manage your taxes smartly, make your savings work harder too. With a Bajaj Finance Fixed Deposit, you can earn returns up to 7.30% p.a. and enjoy guaranteed growth. Open FD Account.

What is Effective tax rate?

The effective tax rate refers to the average rate at which an individual or a corporation is taxed on their total income. It is calculated by dividing the total tax paid by the taxable income, and it gives a more realistic picture of how much one pays in taxes compared to their total earnings. Unlike the marginal tax rate, which is the rate applied to the last portion of your income, the effective tax rate gives an overall percentage of your income paid in taxes.

In simpler terms, if you want to know what percentage of your total earnings you actually paid in taxes, you are looking at your effective tax rate.

Just like understanding your tax rate gives you control over your finances, investing in an FD helps you gain control over your savings. With Bajaj Finance FDs, enjoy flexible tenures, regular payouts, and secure, predictable returns. Check FD Rates.

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How effective tax rate is calculated?

The formula to calculate the effective tax rate is straightforward:

Effective tax rate = (Total Tax Paid ÷ Taxable Income) × 100

This simple calculation helps you understand the percentage of your total income that went toward taxes.

For better understanding, let's break this down with two important steps:

Total tax paid: This is the amount of tax you owe to the government based on your income, deductions, exemptions, and applicable tax slabs.

Taxable income: This is the amount of income that is subject to taxation after considering all allowable deductions, exemptions, and rebates.

Example of effective tax rate calculation

Let us look at an example to make the calculation clearer:

  1. Assume you have an annual income of Rs. 10,00,000. After accounting for deductions like Section 80C, you have a taxable income of Rs. 8,00,000.
  2. Based on the income tax slabs, you pay Rs. 90,000 as total tax.
  3. Using the formula for effective tax rate, we calculate it as:
  4. Effective tax rate = (Total Tax Paid ÷ Taxable Income) × 100
  5. Effective tax rate = (Rs. 90,000 ÷ Rs. 8,00,000) × 100
  6. Effective tax rate = 11.25%
  7. Therefore, the effective tax rate in this case is 11.25%. This means that 11.25% of your total income is going toward taxes.

Note: This example is for illustrative purposes only and does not represent actual tax calculations.

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Effective tax rate vs Marginal tax rate

Understanding the difference between the effective tax rate and the marginal tax rate is crucial for proper tax planning:

  1. Marginal tax rate: The marginal tax rate is the rate at which your last rupee of income is taxed. In India, income tax is progressive, meaning as your income increases, so does the rate at which it's taxed. For example, if your income falls into the highest tax slab of 30%, your marginal tax rate is 30%. However, this rate only applies to income that exceeds a certain threshold.
  2. Effective tax rate: On the other hand, the effective tax rate is the average rate at which your income is taxed. It considers all the tax slabs and deductions applicable to your income, giving you a clearer picture of your overall tax burden.

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Which is lower: Effective tax rate or Marginal tax rate?

The effective tax rate is usually lower than the marginal tax rate. This is because the effective tax rate averages out your tax payments over all your income, taking into account the lower tax rates on the initial portions of your income. For instance, in India, the income tax slab rates start at 5% for lower incomes, increase to 20%, and finally reach 30% for higher incomes.

Even if you fall into the highest tax bracket (marginal tax rate), not all of your income is taxed at that rate. Only the income exceeding a certain threshold is taxed at 30%. Therefore, your effective tax rate will be lower because it averages the lower rates applied to your other income.

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Conclusion

Understanding your effective tax rate helps you see your true tax liability — not just the slab rate. It’s a more realistic measure of your tax outflow and a powerful tool for better financial planning.

Once you know your real tax burden, consider investing in safe, high-return avenues to maximise your income.
A Bajaj Finance Fixed Deposit offers you just that — assured returns, flexible tenures (12–60 months), and complete peace of mind.

Invest in Bajaj Finance FD and make your money work as hard as you do.

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Frequently asked questions

What is the ETR?
The Effective Tax Rate (ETR) is the percentage of your total income that you actually pay as tax. It’s calculated by dividing total tax paid by total taxable income, offering a real-world view of your tax burden.

What is the tax effect calculation?
Tax effect calculation refers to assessing how a specific financial decision or income event impacts your overall tax liability. It helps in understanding how much tax is saved or incurred due to deductions, exemptions, or income adjustments.

Are Bajaj Finance FDs safe for long-term investment?

Absolutely. Bajaj Finance FDs hold the highest safety rating of AAA/STABLE from CRISIL and ICRA, ensuring your money stays secure and grows predictably. Check latest rates. 

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