A recent study conducted by the online financial products marketplace BankBazaar.com reveals a concerning trend for Indian taxpayers: as much as 58% tax is being effectively imposed on taxpayers after accounting for inflation. This hidden tax burden significantly impacts individuals, especially during times of high inflation.

Impact of Inflation on Tax Rates

The study indicates that due to income erosion and inflation, the current top tax slab rate of 30% is effectively 55% in real terms. For instance, taxpayers with an income of Rs 10 lakh are paying an excess tax of Rs 43,226, or Rs 3,602 per month. At an income level of Rs 20 lakh, the excess taxes amount to Rs 1.84 lakh in the old regime and Rs 67,978 in the new regime.

Historical Context and Lack of Adjustments

It has been 12 years since the 2012-13 Union Budget made changes to income tax rates, such as adjusting the 20% and 30% slabs. Since then, there have been no further adjustments to account for inflation. As a result, taxpayers end up paying higher taxes as the cost of living increases.

For instance, every Rs 1 earned in 2012-13 would be effectively worth only Rs 0.55 in 2024-25 when adjusted for inflation. This means that Rs 10 lakh earned in 2012-13 is effectively only Rs 5.50 lakh now. Despite this, tax slab rates have not been modified to reflect inflation in the last 12 years.

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Real Tax Rates on Different Income Levels

The study provides detailed insights into how the real tax rates affect taxpayers at different income levels. For a taxable income of Rs 10 lakh, the tax liability is Rs 1.17 lakh at 11.7% now. In 2013-14, it would have been Rs 1.33 lakh, but if adjusted for inflation, the tax should have been reduced to Rs 73,774 at 7.3%. Thus, the current 'real' tax rate on such an individual is 21% in the old regime. The 'real' rate can go as high as 58% on incomes between Rs 50 lakh to Rs 1 crore.

Discrepancies in the New and Old Regimes

In the new tax regime, there is no provision for inflation adjustment above the Rs 15 lakh level. Similarly, in the old regime, nothing above Rs 5 lakh is inflation-adjusted. The study highlights that the current tax slab rate of 20%, which applies to income between Rs 5 lakh to Rs 10 lakh, should ideally apply to those earning between Rs 9 lakh to Rs 18 lakh. Any income above Rs 18 lakh should only be levied tax at 30%.

Conclusion

The BankBazaar study brings to light the significant impact of inflation on the tax burdens faced by Indian taxpayers. With effective tax rates soaring as high as 58%, there is an urgent need for income tax reforms to adjust tax slabs for inflation. This adjustment would ensure a fairer tax system that reflects the true value of money and reduces the disproportionate tax burden on individuals.

As the cost of living continues to rise, addressing these discrepancies in tax rates is crucial for maintaining economic stability and ensuring that taxpayers are not unfairly penalized due to inflation. The findings of this study underscore the importance of periodic reviews and adjustments to tax policies to keep pace with economic changes and protect the financial well-being of citizens.

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