Human Resource Management

Difference between tax brackets and tax rates in India

Paying taxes is a crucial part of any functioning society, and understanding the tax system is crucial for all taxpayers.

Two important concepts in the Indian tax system are tax brackets and tax rates.

With our experience of dealing with employees many a time these concepts are not understood by them, especially employees who are getting into the tax bracket for the first time.

In this post, we’ll explain the difference between the two and the importance of understanding them.

What are Tax Brackets?

Tax brackets are the income ranges that are subject to different tax rates. In India, there are four tax brackets, and they are updated regularly.

The purpose of tax brackets is to ensure that individuals with higher incomes pay a greater share of their earnings in taxes than those with lower incomes.

Tax brackets help to create a fair and progressive tax system. Tax brackets tend to undergo a change during the budget every financial year.

Tax brackets are different for different categories of taxpayers.

Income tax has classified three categories of “individual “taxpayers such as:

Individuals (aged less than 60 years) including residents and non-residents

Resident Senior citizens (60 to 80 years of age)

Resident Super senior citizens (aged more than 80 years)

Old tax regime vs new tax regime

What are Tax Rates?

Tax rates are the percentage of income that is paid in taxes. In India, there are four tax rates, corresponding to the four tax brackets. They are:

Old Tax Regime vs New Tax Regime Slab  Comparison

Understanding the Relationship Between Tax Brackets and Tax Rates

Tax brackets and tax rates are related, but they are not the same thing. Tax brackets determine the income ranges subject to different tax rates, while tax rates determine the percentage of income that is paid in taxes.

The income that falls in a particular tax bracket is taxed at the corresponding tax rate.

For example, if you earn Rs. 7 lahks per year, the first Rs. 2.5 lakh is tax-free, and the next Rs. 2.5 lakh is taxed at 5%, and the remaining Rs. 2 lahks is taxed at 20%.

How to Calculate Your Tax Liability

To calculate your tax liability, you need to determine which tax bracket your income falls into and the corresponding tax rate.

Then, you must apply the tax rate to the income in that tax bracket. For example, if your income is Rs. 7 lakh per year, your tax liability is calculated as follows:

The first Rs. 2.5 lakh is tax-free

The next Rs. 2.5 lakh is taxed at 5%, which comes to Rs. 12,500

The remaining Rs. 2 lakh is taxed at 20%, which comes to Rs. 40,000

Your total tax liability is Rs. 52,500

Key Differences Between Tax Brackets and Tax Rates

The key differences between tax brackets and tax rates are:

Tax brackets determine the income ranges subject to different tax rates, while tax rates determine the percentage of income that is paid in taxes

Tax brackets are updated regularly to reflect changes in the economy and government policies, while tax rates are typically more stable

Understanding the difference between tax brackets and tax rates is crucial for tax planning and decision-making, as it can help individuals make informed decisions about investments and other financial matters

Conclusion

In conclusion, tax brackets and tax rates are crucial components of the Indian tax system. Understanding the difference between the two is important for all taxpayers, as it can help them make informed

FAQs

Are the income tax slabs for FY 2022-23 in the case of the new tax regime the same for all taxpayers irrespective of age?

Yes, the new income tax slabs for FY 2022-23 (AY 2023-24) under the new tax regime do not change based on the age of the taxpayer.

So, the limit of maximum tax-exempt income is Rs 2.5 lakh regardless of the individual taxpayer’s age.

Do I need to file Income Tax Return (ITR) if my annual income is below Rs 2.5 lakh?

It is mandatory to file your ITR only if your total annual income exceeds the maximum exempt amount of Rs 2.5 lakh.

Can I Claim my personal expenses while calculating my taxable income or liability?

No, you cannot claim a deduction of personal expenses while computing the taxable income.

You can claim expenses which are provided under the Income-tax Act.

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