Taxpayers often assume the tax slab their income falls in is the amount of tax that they pay. A discussion on the difference between the marginal tax rate vs. the effective tax rate.
Consider a salaried taxpayer who made Rs. 25 Lakhs in FY 2025-2026. In the new tax regime, after the standard deduction of Rs. 75,000, the net taxable amount is Rs. 24.25 Lakhs.
The tax slabs are as follows
| Tax Slabs for FY 2025-26 | Tax Rates for FY 2025-26 |
| Up to Rs. 4 lakh | Nil |
| Rs. 4 lakh to Rs. 8 lakh | 5% |
| Rs. 8 lakh to Rs. 12 lakh | 10% |
| Rs. 12 lakh to Rs. 16 lakh | 15% |
| Rs. 16 lakh to Rs. 20 lakh | 20% |
| Rs. 20 lakh to Rs. 24 lakh | 25% |
| Above Rs. 24 lakh | 30% |
The tax for the above example is computed as follows:
- The first Rs. 4 Lakhs is tax-free.
- The next four lakhs is taxed at 5% = 5%*400000 = Rs. 20,000
- The next four lakhs is taxed at 10% = 10%*400000 = Rs. 40,000
- The next four lakhs is taxed at 15% = 15%*400000 = Rs. 60,000
- The next four lakhs is taxed at 20% = 15%*400000 = Rs. 80,000
- The next four lakhs is taxed at 25% = 15%*400000 = Rs. 1,00,000
- This accounts for Rs. 24L of the net taxable income.
- The balance of Rs. 25,000 is taxed at 30% =Rs. 7500
- The tax payable as per the slab is the sum of the above = Rs. 3,07,500
We are not done yet.
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- There is a 4% cess on the tax, which is Rs. 12,300.
The total tax payable is therefore Rs. 3,19,800. This is only 12.79% of the total income. This is known as the effective tax rate, which is well below the marginal tax rate of 30%.
So the next time someone says they fall in the 30% slab, do not assume they pay 30% tax! Take a moment to understand how marginal tax rates work. The 30% tax only applies to the income above a threshold.
You can understand how this works for your income and compare it with the new tax regime with our free calculator: Budget 2025: New Tax Regime (new slabs) vs Old Tax Regime Calculator: Check which is better.