What is the effective income tax paid on salary?

What is the effective income tax paid on the salary that we earn?

Whenever this question is posed on people their answer is, “as per our tax slab”.

But when the question becomes more specific, people start to falter. Why?

Because they have never done this calculation themselves.

If you also subconsciously desired to get an answer to this question, please read this article.

What I am going to present here is no rocket science. But it will give you an answer that you always wanted to know.

You yourself could have done these calculations to find the answer.

But probably you thought, its not worth the effort and time. No problem.

Allow me to do some number crunching for you.

So lets start with some interesting statistics.

#1. Which countries has the highest income tax rate in the world?

If you are worried about the applicable income tax slabs in India, be prepared for some surprise.

India is certainly not the country with maximum tax rate.

Though it is not so low, but it is certainly not comparable with most taxed countries of the world.

Few big countries, where income tax rate applicable on individuals is higher than India, are as below:

Effective income tax paid on salary_Countries

So comparatively, we can see that the level of Income tax in India is not so bad.

Moreover, what is shown above for India (35.54%), is maximum tax rate. An individual whose annual income is above Rs.1.0 Crore will come under this tax slab.

For people with lower income levels, will have to pay tax as indicated in below tax slabs:

Tax slab applicable in India for individual is as below:

Effective income tax paid on salary_TaxSlab

So now, allow me to ask my question again…

#2. What income tax we pay on our salary?

If we see the above income tax slab applicable in India, following answers will emerge:

  • 0% – for people earning Rs.2.5 lakhs and below.
  • 5% – for people earning Rs.5.0 lakhs and below.
  • 20% – for people earning Rs.10.0 lakhs and below.
  • 30% – for people earning above Rs.50 lakhs.

What do we conclude from here?

People earning below Rs.50 lakhs may think casually that, they are paying 30% of their salary to government as income tax, right?

But this is not the right conclusion.

#3. What is the effective income tax paid in India on salary?

The effective income tax paid on our salaries is much less.

Not 20% or 30% as seen above….

To quantify, we need to do some calculations.

So lets take some typical case studies here:

#3.1 Case 1: No Income Tax Savings Done.

This is a typical case of those young people, who have just got into a job.

These newbies do not have a priority to save income tax.

Hence their tax saving portfolio looks like this:

  • 24 Section – No home loan availed.
  • 80C Section – No savings done under this section
  • 80D Section – No medi-claim done under this section.

What will be the effective income tax paid by this group of people:

  • Income from salary (Rs.) is as follows:
    1. 5,00,000 – Tax Rs.12,875 p.a. (effective tax paid 2.58%)
    2. 6,00,000 – Tax Rs.33,475 p.a. (effective tax paid 5.58%)
    3. 7,00,000 – Tax paid Rs.54,075 p.a. (effective tax paid 7.73%)
    4. 8,00,000 – Tax paid Rs.76,675 p.a. (effective tax paid 9.33%)
    5. 9,00,000 – Tax paid Rs.95,275 p.a. (effective tax paid 10.59%)
    6. 10,00,000 – Tax paid Rs.1,15,875 p.a. (effective tax paid 11.59%)
    7. 11,00,000 – Tax paid Rs.1,46,775 p.a. (effective tax paid 13.34%)
    8. 12,00,000 – Tax paid Rs.1,77,675 p.a. (effective tax paid 14.81%)

Effective income tax paid on salary (no tax Saving)

#3.2 Case 2: Income Tax Saved (but no home loan).

This is a typical case of those young people, who have been in job for some years but has not yet bought a house for self.

These young men invests in tax savings options on priority

Hence their tax saving portfolio looks like this:

  • 24 Section – No home loan availed.
  • 80C Section – Deduction of Rs.1,50,000 claimed.
  • 80D Section – Deduction of Rs.50,000 claimed.

What will be the effective income tax paid by this group of people:

  • Income from salary (Rs.) is as follows:
    • 10,00,000 – Tax paid Rs.74,675 p.a. (effective tax paid 7.47%)
    • 11,00,000 – Tax paid Rs.95,275 p.a. (effective tax paid 8.66%)
    • 12,00,000 – Tax paid Rs.1,15,875 p.a. (effective tax paid 9.66%)
    • 13,00,000 – Tax paid Rs.1,46,775 p.a. (effective tax paid 11.29%)
    • 14,00,000 – Tax paid Rs.1,77,675 p.a. (effective tax paid 12.29%)
    • 15,00,000 – Tax paid Rs.2,08,575 p.a. (effective tax paid 13.91%)
    • 16,00,000 – Tax paid Rs.2,39,475 p.a. (effective tax paid 14.97%)
    • 17,00,000 – Tax paid Rs.2,70,375 p.a. (effective tax paid 15.90%)

Effective income tax paid on salary (tax saved partly)

#3.2 Case 3: Income Tax Saved (with home loan).

This is a typical case of middle aged, working class people.

This that group of people who are very aware of their income and expense loads.

They do everyting to keep their income tax load as low as possible.

Hence their tax saving portfolio looks like this:

  • 24 Section – Deduction of Rs.2,00,000 claimed.
  • 80C Section – Deduction of Rs.1,50,000 claimed.
  • 80D Section – Deduction of Rs.50,000 claimed.

What will be the effective income tax paid by this group of people:

  • Income from salary (Rs.) is as follows:
    • 15,00,000 – Tax paid Rs.1,46,775 p.a. (effective tax paid 7.47%)
    • 16,00,000 – Tax paid Rs.1,77,675 a. (effective tax paid 8.66%)
    • 17,00,000 – Tax paid Rs.2,08,575 p.a. (effective tax paid 9.66%)
    • 18,00,000 – Tax paid Rs.2,39,475 p.a. (effective tax paid 11.29%)
    • 19,00,000 – Tax paid Rs.2,70,375 p.a. (effective tax paid 12.29%)
    • 20,00,000 – Tax paid Rs.3,01,275 p.a. (effective tax paid 13.91%)
    • 21,00,000 – Tax paid Rs.3,32,175 p.a. (effective tax paid 14.97%)
    • 22,00,000 – Tax paid Rs.3,63,075 p.a. (effective tax paid 15.90%)

Conclusion

It is good to be aware of ones effective income tax load.

We often live in a miss conception that, we are paying too high income tax on our salary.

But this is only a misnomer.

Our salary in our hard earned money. Even if we are asked to pay only 1% income tax, we will feel the pinch.

But this does not mean that income tax in bad.

This way there is an equivalent contribution of all citizens towards maintenance and growth of our nation.

There are countries in the world who charge abnormally high income tax.

But our India is not one of those nations.

The effective income tax paid by average middle class Indian’s is as below:

Effective income tax paid on salary - Conclusion


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