Income tax on slabs: a year's salary
Change a person's yearly income from 4 lakh to 25 lakh rupees. See the income cut into slabs, the tax on each slab, the total tax, and why the tax as a per cent of income is always less than the top rate.
Core concept
Income tax is charged in slabs: each part of the income is taxed at its own rate, so the total tax is the sum of the slabs, and the average rate is less than the rate on the last rupee
Topic: Taxation
People who earn money pay income tax to the government on their yearly income. The tax is not one rate on the whole income. The income is cut into slabs: in this lab the first 5 lakh rupees is taxed at 1% (the social security tax), the next 2 lakh at 10%, the next 3 lakh at 20%, the next 10 lakh at 30%, and anything above 20 lakh at 36%. The tax is the sum of the tax on each slab. One lakh is Rs 100000, so 1% of a lakh is Rs 1000. Shops also add value added tax (VAT) of 13% to the price of most goods, but that is a tax on spending, not on income.
What you will learn
- Work out income tax slab by slab.
- Find the tax as a per cent of income.
- Explain why the average rate is less than the top rate.
Before you start
- Know how to find a per cent of an amount.
Materials
- A notebook and a calculator
Equipment
- None
Procedure
- Record an income of 8 lakh rupees.
- Record an income of 4 lakh rupees.
- Record an income of 25 lakh rupees.
- Record an income of 15 lakh rupees.
How this simulation is simplified
- The slabs are a simplified version of the slabs for one unmarried person; real rates and slabs change with each year's budget.
- There are no allowances or deductions.