In India, the tax structure can turn the act of earning more into a net financial loss. One such scenario occurs when an individual’s income crosses the Rs 50 lakh threshold.
Although this marks the start of a higher tax bracket, the transition comes with hidden slab penalties that many overlook.
In India’s progressive tax system, income beyond Rs 50 lakh is taxed at 30%. While this may seem like a standard increase, it’s not just the higher tax rate that penalises higher earners. Various surcharges, cess, and hidden deductions kick in, leading to a situation where earning marginally above Rs 50 lakh may reduce disposable income more significantly than expected.
Marginal Tax Rate Woes: When Extra Income Doesn’t Add Up
As per Dr. Swapnil Sahoo, Area of Expertise- Strategy Great Lakes Institute of Management, Gurgaon, “for instance, the income beyond Rs 50 lakh attracts an additional 10% surcharge, and the income beyond Rs 1 crore is taxed at a higher rate, further escalating the tax burden. Additionally, middle-class benefits such as exemptions on tax-saving investments or deductions may be limited or eliminated as income rises, increasing the effective tax rate.”
Moreover, high earners often face the “marginal tax rate” dilemma, where the extra income above the Rs 50 lakh threshold is heavily taxed, while marginal increases in income can lead to only small increases in net disposable income. This disproportionate taxation structure creates a disincentive for individuals to exceed this threshold, despite the promise of financial success.
“Thus, for many middle to high-income earners, surpassing Rs 50 lakh can lead to a paradoxical situation where more income equates to lesser disposable income, ultimately resulting in a net loss despite higher earnings. The system needs a thoughtful revision to incentivize growth without penalizing the rising earners,” Dr. Swapnil Sahoo added.
The Rs 50 Lakh Tax Cliff: When More Income Means Less in Hand
Earning just above Rs 50 lakhs in India can trigger a 10% surcharge on your income tax, effectively increasing your tax liability sharply. Earnings just above Rs 50 lakh attract a 10% surcharge on the tax amount. A tiny increase in income can spike your post-tax income-resulting in scenarios where the extra take could effectively be 0% or even negative.
“Understanding these hidden slab penalties is crucial not just from a compliance standpoint but for smarter financial planning. These surcharges are levied at multiple thresholds-Rs 50 Lakh, Rs 1 Crore, Rs 2 Crore; therefore, it cannot be emphasised enough that the real impact of crossing them should be weighed in,” commented Kumar Binit, CEO, airpay money.
Without taking due action, individuals might end up penalising their take-home pay. They would have to strategise compensation planning accordingly to mitigate net income shocks and ensure that an increase in income translates to a meaningful financial gain.