Jun 26, 2009

Amazing Facts about Income Tax - Tax Rates

Photo by danorbit

I’ve already covered a few amazing facts about Indian income tax where it is discussed how in some cases income tax is imposed without earning any income.

But there are certain other amazing facts about Income tax. Here, I discuss a list of few amazing facts about “Income Tax Rates”:

Highest income tax rates in India
Can you ever imagine that at one time, highest personal income tax rate in India was more than 90%?

During Indira Gandhi’s regime in 1973-74, India’s personal income tax had eleven tax brackets with highest marginal income tax rate of 97.5 per cent. Just imagine paying Rs 97.5 to the government out of every Rs 100 earned. Well, sounds rather scaring, doesn’t it? This kind of laws only helps in sowing the seeds of corruption.

Maximum marginal rate of tax
If your taxable income falls in the range of Rs 10 lakh to Rs 10.30 lakh, then what’s your maximum marginal rate of tax? Just try to guess! It is 103%. Put another way, the marginal tax you pay on your income between Rs 10 lakh and Rs 10.30 lakh is more than your additional / marginal income. Isn’t it amazing? But, how is it possible?

It is because the moment your income crosses the mark of Rs 10 lakh, you become liable to pay a surcharge of 10% on tax. But isn’t it that the marginal relief is allowed to ensure that the tax payable by levy of surcharge of 10% doesn’t exceed the amount of additional income in excess of Rs 10 lakh? Yes, of course it is allowed; however, there is no marginal relief against education cess of 3% which is levied on basic tax PLUS surcharge and as a result your marginal tax rate becomes 103%.

Let’s consider an example: Suppose you’re a 40 year old male resident individual and your taxable income is Rs 10 lakh for the financial year (FY) ending March 2009. Now, as per the applicable tax rates for the income earned during the previous year (08-09), your total tax liability works out to be Rs 2,11,150 which includes a basic tax of Rs 2,05,000 and surcharge of 6,150. Further let’s increase your income by, say, another Rs 30,000 so that your taxable or “Net Income” becomes Rs 10.30 lakh. Now based on the tax slabs your revised total tax liability comes to Rs 2,42,050 (tax of Rs 2,14,000, surcharge of Rs 21,000 and education cess of Rs 7,050).

Put simply, if you’ve a taxable income of Rs 10 lakh, you’re left with a net amount of Rs 7,88,850 in hand after paying a tax of Rs 2,11,150. On the other hand, if your taxable income is Rs 10.30 lakh, you are left with Rs 7,87,950 after paying a tax of Rs 2,42,050. In other words, additional earnings of Rs 30,000 make you poorer by Rs 900. You can verify the above calculations yourself by taking the help of
Income Tax Calculator.

It implies that it is better to forego the additional income or donate it to a charity rather than paying the tax.

Now there’s another teaser for you: What’s the break even point i.e. at what level of income your additional tax becomes equals to the additional income? (Note: There will be slight difference in case of senior citizen and women assesses).

Maximum tax rate required in a Utopian Society
Just imagine for a second if everybody starts paying tax dues honestly, at what rate of tax government will be able to collect the same revenue. I think 5 per cent will be more than enough. OK, now come out of the dream.

Also see:

1. Life Insurance – Most Amazing Fact

2. Marginal vs. Effective Tax Rates

3. Income Tax Calculator FY 2008-09

4. Taxation of Notional Income

5. Income Tax Calculator FY 2009-10


  1. Dear Sir,

    Kindly accept my sincere and heartfelt encomiums, kudos and hats-offs for your wonderful elucidations of Income-tax nuances, kernels and other allied queries in a most charming, subtle and down-to-earth examples without employing any technical pomp and pageantry. Without any verbal legerdemains you have undoubtedly proved that one need not be a cognoscenti to be able to grasp this and be sufficient even if a ignoramus makes an attempt to reading this spectacular intellectual treasure-trove.

    With regards and respects,

  2. Hi Kesavan!

    Thanks a lot for the praise.

    I’m really impressed by your comment. Let me confess that I had to consult the dictionary and learnt so many new words. Thanks once again for expressing your opinion with great eloquence and verbosity.

    By the way, you can call me Fisher.


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