Definition
Marginal Tax Rate
The marginal tax rate is the rate of tax applied to your next rupee of income — the rate of your highest income slab.
The marginal tax rate is the percentage you pay on an additional rupee of income, equal to the slab your top income falls into (plus surcharge and cess where applicable). It is what matters when evaluating extra income, a bonus, or the tax saved by a deduction.
For example, a deduction reduces taxable income, so its value equals your marginal rate — a higher-rate taxpayer saves more from the same deduction than a lower-rate one. This is why high earners benefit most from old-regime deductions.
The marginal rate is higher than the effective rate because of slab-based taxation. Understanding both helps with smart decisions on deductions, additional income, and choosing the right tax regime.
Related terms
- Section 80CSection 80C allows a deduction from taxable income for specified investments and expenses, such as EPF, PPF, ELSS, life insurance premiums and home-loan principal, under the old regime.
- Income Tax SlabIncome tax slabs are the income bands at which progressively higher tax rates apply, so higher earnings are taxed at higher rates.
- Effective Tax RateThe effective tax rate is the actual percentage of your total income that you pay as tax, after slabs, deductions, surcharge and cess.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.