Inflation Adjustment In Tax Rate Is Long Due, Real Tax Rate Is As High As 58 Per Cent: Study

A study conducted by online financial products marketplace BankBazaar.com revealed that as much as 58 per cent tax is being imposed on taxpayers after one account for inflation.

During current high inflation times, an income of Rs 18 lakh is where the 30 per cent tax slab should be rather than the current Rs 10 lakh limit, the study said.

Due to income erosion and inflation, the current top slab rate of 30 per cent is 55 per cent in terms of ‘real’ rates if you adjust for inflation.  For instance, for an income of Rs 10 lakh, taxpayers are paying an excess tax of Rs 43,226, or Rs 3602 per month. At Rs 20 lakh, the excess taxes paid are Rs 1.84 lakh in the old regime and Rs 67,978 in the new regime, the study said.

Also read; 5 Ways You Can Save Tax Without Making Fresh Investments

Real Tax Rates & How Much Excess Tax Are You Paying?

It has been 12 years since the 2012-13 Union Budget when changes to income tax rates, such as adjusting the 20 per cent and 30 per cent slabs were done. Now due to the absence of inflation adjustments, taxpayers end up paying higher taxes as the cost of living increases.

Every Rs 1 earned in 2012-13 would be effectively worth only Rs 0.55 in 2024-25 when adjusted for inflation. This means that Rs 10 lakh earned in 2012-13 is effectively only Rs 5.50 lakh now. However, tax slab rates have not been modified by inflation in the last 12 years.  For instance, if an individual has a taxable income of Rs 10 lakh, under the old regime, the tax liability is Rs 1.17 lakh at 11.7 per cent now.

In 2013-14 it would have been Rs 1.33 lakh, but if account inflation, the tax should have been reduced to Rs 73,774 at 7.3 per cent. So currently, the ‘real’ tax rate on such an individual is 21 per cent in the old regime. The ‘real’ rate can go as high as 58 per cent on incomes between Rs 50 lakh to Rs 1 crore.

In the new regime also above the Rs 15 lakh level, there is no inflation adjustment provided. In the old regime, nothing above Rs 5 lakh is inflation-adjusted.  When the current tax Slab rate of 20 per cent applies to income between Rs 5 lakh to Rs 10 lakh, Bankbazaar says those between 9 lakh to Rs 18 lakh should fall in this bracket.  Any income above Rs 18 lakh should only be levied tax at 30 per cent, it said.