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Tax Bracket

Reviewed by Sweta | Updated on Jul 27, 2020

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Introduction

Tax bracket refers to the different slabs at which tax rates are applicable in a progressive way. Tax brackets move from the lowest to the highest income group.

What is Tax Bracket?

Tax bracket begins with a basic exemption slab or the basic exemption limit. Taxpayers earning up to the basic exemption limit are not liable to income tax.

Who is eligible to pay?

Tax brackets are fixed on the premise that higher the income, higher the tax rate. The tax brackets are fixed based on a progressive tax system.

Tax brackets are generally applied for individual taxpayers. The other taxpayers such as corporates, co-operative societies, and partnerships are taxed at a flat rate without any basic exemption. The other taxpayers also do not have the incentive to invest and save tax, unlike the individual taxpayers. However, these other taxpayers may be entitled to industry-based tax incentives based on the amount of investments made by them and so on.

Low-income earners fall in the lowest tax brackets and hence pay less tax in comparison to high-income earners who fall in the highest tax bracket and pay higher tax.

As per the union budget 2019, there are three tax brackets. The first one is 5% for total income between Rs 2.5 lakh and Rs 5 lakh. The second is 20% for total income between Rs 5 lakh and Rs 10 lakh. The third one is 30% for total income between Rs 10 lakh and Rs above.

The basic exemption limit in India is Rs 2.5 lakh. An individual has no tax incidence in India for income below Rs 2.5 lakh.

An individual has to calculate the gross total income by aggregating the income under various heads namely salary, house property, business or profession, capital gains, and other sources. The tax deductions have to be allowed from the gross income. The taxpayer is liable to pay tax on the total income after allowing the income tax deductions.

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