The Marginal Tax Rate refers to the tax rate that applies to each tax bracket in a taxpayer’s income or other taxable income for which they qualify. It is the percentage taken from the taxpayer’s additional rupee of taxable income above a predetermined income threshold.
As an individual’s income increases, so does their marginal tax rate. The maximum marginal tax rate is the highest income tax rate applied to the top income bracket. According to Section 2(29C) of India’s Income Tax Act, this refers to the maximum rate of income tax, along with any applicable surcharges, for the highest income bracket. This rate is determined annually in the Finance Act.
How much tax do I have to pay? Calculate now
A K Mandhan, a financial planner and SEBI registered research analyst, pointed out the lowest marginal tax rate is in UAE & Saudi, which is 0%. The highest tax rate prevails in Finland, which is 56.9%. He highlighted that on a Rs 10 crore salary, a person in Finland would earn Rs 4.31 crore after deducting taxes, whereas the same person will earn Rs 10 crore if he is in UAE.
Here’s the tax rate across different countries:
Top marginal tax % & net in-hand amount in 50 top GDP countries:
> USA: 37% → ₹6.3 CR
> China: 45% → ₹5.5 CR
> Japan: 55.97% → ₹4.4 CR
> Germany: 45% → ₹5.5 CR
> India: 42.74% → ₹5.7 CR
> UK: 45% → ₹5.5 CR
> France: 55.4% → ₹4.5 CR
> Italy: 47.2% → ₹5.3 CR
> Brazil: 27.5% → ₹7.25 CR
> Canada: 33% → ₹6.7 CR
> Russia: 13% → ₹8.7 CR
> S. Korea: 45% → ₹5.5 CR
> Australia: 45% → ₹5.5 CR
> Spain: 54% → ₹4.6 CR
> Mexico: 35% → ₹6.5 CR
> Indonesia: 35% → ₹6.5 CR
> Netherlands: 49.5% → ₹5.05 CR
> Saudi Arabia: 0% → ₹10 CR
> Turkey: 40% → ₹6 CR
> Switzerland: 40% → ₹6 CR
> Taiwan: 40% → ₹6 CR
> Poland: 36% → ₹6.4 CR
> Sweden: 52.3% → ₹4.77 CR
> Belgium: 53.5% → ₹4.65 CR
> Thailand: 35% → ₹6.5 CR
> Argentina: 35% → ₹6.5 CR
> Austria: 55% → ₹4.5 CR
> Norway: 39.6% → ₹6.04 CR
> UAE: 0% → ₹10 CR
> Israel: 50% → ₹5 CR
> South Africa: 45% → ₹5.5 CR
> Malaysia: 30% → ₹7 CR
> Denmark: 55.9% → ₹4.41 CR
> Singapore: 22% → ₹7.8 CR
> Philippines: 35% → ₹6.5 CR
> Ireland: 52% → ₹4.8 CR
> Vietnam: 35% → ₹6.5 CR
> Hong Kong: 15% → ₹8.5 CR
> Chile: 40% → ₹6 CR
> New Zealand: 39% → ₹6.1 CR
> Finland: 56.9% → ₹4.31 CR
> Colombia: 39% → ₹6.1 CR
> Portugal: 48% → ₹5.2 CR
> Czechia: 23% → ₹7.7 CR
> Hungary: 15% → ₹8.5 CR
> Greece: 45% → ₹5.5 CR
> Ecuador: 35% → ₹6.5 CR
> Peru: 30% → ₹7 CR
Understanding marginal tax rates is crucial in financial planning. It is essential for taxpayers to be aware of these rates in order to calculate the portion of their salary increases or bonuses they can retain after tax deductions. Additionally, knowing their marginal tax rate helps taxpayers determine the maximum contribution they can make to their retirement accounts, which offer tax advantages.
In line with Section 2(29C) of India’s Income Tax Act, the maximum marginal tax rate signifies the highest income tax rate, along with any additional surcharges, that is applicable to the top income bracket. This rate is specified annually in the Finance Act for each financial year.
Effective tax rate vs marginal tax rate
According to Investopedia, The effective tax rate provides a more precise depiction of an individual’s or entity’s total tax liability compared to their marginal tax rate, and it is usually lower. The marginal tax rate pertains to the highest tax category into which their earnings fall. Within a progressive income tax structure, such as that in the United States, earnings are taxed at various rates that escalate as income surpasses specific thresholds. Two individuals or companies earning income within the same upper marginal tax category could potentially have significantly different effective tax rates depending on the proportion of their earnings that fell within the top category.