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No kidding, it's a taxing process
November, 20th 2006

The expectation among taxpayers seems to be increasing with each passing day as the budget approaches nearer. One of the main expectations of taxpayers is a reduction in tax. There are various ways in which this can be achieved, including a change in the tax slabs. However, there is some confusion regarding the difference between lower tax rate and lower tax burden. Let us explore the matter in detail.

The difference

Most people feel that all things related to tax payment are the same. Hence, if there is a rise or fall in the tax rate, the way in which this change is brought about does not matter, as long as the amount to be paid changes. However, the way this change occurs is also important. The first point to be considered is the change in tax rate. A reduction in tax rate benefits the taxpayer because for the same income, a lower tax has to be paid. The second point to be examined is the total tax to be paid. The amount of tax changes not only when the tax rate changes, but also when the basic exemption limit or the tax slabs change. All these factors impact an individuals tax calculation. Lets consider all these factors individually.

Basic exemption limit

One of the first things to be considered in the tax calculation process is the basic exemption limit. This is the income figure below which the amount is not taxed. Currently, there are three basic exemption limits for various individuals depending upon their characteristics. For a male individual, the basic exemption limit is Rs 1 lakh for financial year 2006-07 while for a female individual, this limit is Rs 1.35 lakh. For a senior citizen (person aged 65 years or above), the basic exemption limit is Rs 1.85 lakh. Any change in the exemption limit means that either a larger or smaller sum will not be taxed, this impacts the overall tax to be paid by the individual.


A slab is a certain band of income for which a specific tax rate is applicable. The income in the next slab will have the second rate applicable and so on. In India, several slabs exist for an individual and the incidence of tax rises as one goes higher up the slabs. For a male individual, no tax needs to be paid till his income touches Rs 1 lakh.

For income between Rs 1 lakh and Rs 1.5 lakh, the tax rate is 10%; for income between Rs 1.51 lakh and Rs 2.5 lakh, the tax rate is 20% while for income over Rs 2.5 lakh, the applicable tax rate is 30%. Further, for income above Rs 10 lakh, a surcharge of 10% is applicable. Individuals have to calculate their respective tax liabilities depending upon their income and the slab it falls under. Often, the tax rate may remain the same, but if the slab changes, then the total tax impact may change.

Tax rate

The tax rate also affects an individuals tax liability. The tax rate is the figure at which the tax is calculated for a certain slab of income. Most taxpayers prefer a lower tax rate, so that their tax liability is less.

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