4 min
20-March-2025
The marginal tax rate is the percentage of tax applied to an individual’s or business’s last earned rupee of income. It follows a progressive tax system, meaning that higher income levels attract higher tax rates. Instead of a flat rate, income is divided into different slabs, and each portion is taxed at its respective rate.
For example, if a taxpayer’s income places them in a 30% tax slab, only the portion of income exceeding the lower threshold of that slab is taxed at 30%. The rest is taxed at lower rates according to the slab system. Here are some key features of marginal tax rate
Note: Under both regimes, a surcharge applies to high-income taxpayers, and cess at 4% is levied on the total tax amount.
The old tax regime allows deductions like Public Provident Fund (PPF) investments, while the new regime offers lower tax rates but fewer deductions. Choosing the right regime can help taxpayers optimise tax savings.
The highest income tax slab in India is 30% for incomes above Rs. 15 lakh.
A surcharge of 10% to 37% applies to high-income earners with incomes exceeding Rs. 50 lakh.
A 4% health and education cess is added to the total tax liability.
The maximum marginal tax rate for individuals earning over Rs. 5 crore is around 42.74% (including surcharge and cess).
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.
Why marginal tax rate matters:
Encourages fair taxation
Higher earners contribute more tax, reducing income inequality.
Ensures that lower-income groups bear less tax burden.
Affects financial planning
Helps individuals and businesses plan investments and savings.
Maximising deductions like Public Provident Fund (PPF) can lower taxable income.
Impacts economic behaviour
Influences work incentives, savings, and investment decisions.
Affects corporate tax planning and business expansion strategies.
Government revenue generation
Provides funding for infrastructure, welfare, and public services.
Progressive taxation ensures sustainable economic growth.
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.
For example, if a taxpayer’s income places them in a 30% tax slab, only the portion of income exceeding the lower threshold of that slab is taxed at 30%. The rest is taxed at lower rates according to the slab system. Here are some key features of marginal tax rate
- It ensures fair taxation by imposing higher taxes on higher incomes.
- It affects income tax planning, as taxpayers can use deductions to lower taxable income.
- It helps the government generate progressive revenue without overburdening low-income earners.
- It applies to both individuals and businesses under different tax structures.
Marginal tax rates in India
India follows a slab-based marginal tax system, meaning that different portions of income are taxed at increasing rates. The slabs vary based on the income level and type of taxpayer, such as individuals, Hindu Undivided Families (HUFs), and companies.| Income Slab (Rs.) | Old Regime Tax Rate | New Regime Tax Rate |
| 0 – 2,50,000 | Nil | Nil |
| 2,50,001 – 5,00,000 | 5% | 5% |
| 5,00,001 – 7,50,000 | 20% | 10% |
| 7,50,001 – 10,00,000 | 20% | 15% |
| 10,00,001 – 12,50,000 | 30% | 20% |
| 12,50,001 – 15,00,000 | 30% | 25% |
| Above 15,00,000 | 30% | 30% |
Note: Under both regimes, a surcharge applies to high-income taxpayers, and cess at 4% is levied on the total tax amount.
The old tax regime allows deductions like Public Provident Fund (PPF) investments, while the new regime offers lower tax rates but fewer deductions. Choosing the right regime can help taxpayers optimise tax savings.
What is the maximum marginal tax rate
The maximum marginal tax rate (MMTR) is the highest effective tax rate applicable to an individual or entity. It includes income tax, surcharge, and cess, resulting in an overall tax liability greater than the standard slab rate.The highest income tax slab in India is 30% for incomes above Rs. 15 lakh.
A surcharge of 10% to 37% applies to high-income earners with incomes exceeding Rs. 50 lakh.
A 4% health and education cess is added to the total tax liability.
The maximum marginal tax rate for individuals earning over Rs. 5 crore is around 42.74% (including surcharge and cess).
Example of maximum marginal tax rate calculation
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.
Importance of marginal tax rate
The marginal tax rate plays a crucial role in shaping tax policies, individual financial planning, and economic growth. Its progressive structure ensures fairness while generating revenue for government initiatives.Why marginal tax rate matters:
Encourages fair taxation
Higher earners contribute more tax, reducing income inequality.
Ensures that lower-income groups bear less tax burden.
Affects financial planning
Helps individuals and businesses plan investments and savings.
Maximising deductions like Public Provident Fund (PPF) can lower taxable income.
Impacts economic behaviour
Influences work incentives, savings, and investment decisions.
Affects corporate tax planning and business expansion strategies.
Government revenue generation
Provides funding for infrastructure, welfare, and public services.
Progressive taxation ensures sustainable economic growth.
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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