Definition
Effective Tax Rate
The effective tax rate is the actual percentage of your total income that you pay as tax, after slabs, deductions, surcharge and cess.
Your effective tax rate is total tax paid divided by total income — the real, blended rate, as opposed to the marginal rate (the slab applying to your last rupee of income). Because income is taxed in slabs, only part of your income is taxed at the top rate, so the effective rate is always lower than the marginal rate.
Deductions, the standard deduction, the 87A rebate, surcharge and cess all shape the final effective rate. Comparing the effective rate under the old versus new regime is the clearest way to decide which is cheaper for you.
Knowing your effective rate also helps in decisions like the value of a tax deduction (saved at your marginal rate) and the after-tax return on investments such as FDs whose interest is taxed at slab rates.
Related terms
- Income Tax SlabIncome tax slabs are the income bands at which progressively higher tax rates apply, so higher earnings are taxed at higher rates.
- Old vs New Tax RegimeIndia offers two personal income-tax regimes: the old one with various deductions and exemptions, and the new one with lower slab rates but most exemptions removed.
- SurchargeA surcharge is an extra levy charged on top of your income tax once your total income crosses high-income thresholds.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.