Marginal Tax Rate

Marginal Tax Rate is applicable for all the brackets of income of a taxpayer. This is also applicable on any other taxable income for which the taxpayer qualifies. Knowing about Marginal Tax Rates is important when you doing financial planning.

Marginal Tax Rate is the tax rate that is applicable for each tax bracket of a taxpayer’s income or other taxable income for which he or she qualifies. It is the percentage taken from the taxpayer’s next rupee of taxable income over and above a set income threshold.

As an individual’s income rises so will his or her marginal tax rate. The main objective of marginal tax rates is to tax individuals on the basis of what they earn, where people with lower income are taxed at lower rates as compared to people with higher income.

Marginal Tax Rates in India:

According to the World Bank, the highest marginal tax rate (individual rate %) in India was last measured at 30.9% in 2013.

The corporate marginal tax rates in India from 2006 - 2015 are as follows:

2006 - 33.66%

2007 - 33.99%

2008 - 33.99%

2009 - 33.99%

2010 - 33.99%

2011 - 32.44%

2012 - 32.45%

2013 - 33.99%

2014 - 33.99%

2015 - 34.61%

Importance of Marginal Tax Rate:

Marginal tax rates are important when it comes to financial planning. For taxpayers, knowing about marginal tax rates is necessary in order to ascertain what amount of their raises or bonuses they get to keep after deduction of taxes. It is also helps taxpayers determine how much they can contribute to their retirement accounts, which yield them tax benefits.

Maximum Marginal Tax Rate:

In certain cases, like in the case of a Trust of an Association of Person (AOP), income is required to be taxed at the maximum marginal rate, which means there will be no exception limit or slab rate.

As per Section 2(29C) of the Income Tax Act, 1961, the term “maximum marginal rate” means the rate of income-tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of an individual, association of persons or body of individuals as specified in the Finance Act of the relevant year.

Assessment of Association of Persons (AOP) or Body of Individuals (BOI) with regards to Marginal Tax Rate:

The assessment of the members of AOP or BOI depends on whether they are eligible to be charged tax at the maximum marginal rate or not at all.

If an AOP or BOI is chargeable to tax at a maximum marginal rate or any higher rate, the share of profit of a member is exempt from tax. Therefore, it is not to be included in the total income of the member as per Section 86(a)

The rate of 30.9% charged is the maximum marginal rate of tax and if such rate is applied then the share of profit of the member is exempt from tax

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