Home Discover Journals India once had a top marginal tax rate of 97.75%. Tracing the evolution of taxation in India

India once had a top marginal tax rate of 97.75%. Tracing the evolution of taxation in India

By Finserv MARKETS - Aug 3,2019
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India once had a top marginal tax rate of 97.75%. Tracing the evolution of taxation in India

The first time tax rates were tinkered with in independent India, the maximum marginal rate hit 97.75%. This was implemented in the Union Budget 1949-50 under then finance minister John Mathai. Tax on incomes up to Rs. 10,000 was cut by a quarter of an anna, from one anna to nine pies in the first slab and from two annas to “one nine pies” in the second slab. A currency popularly used throughout India and Pakistan, an anna was equal to 1/16 a rupee, while four paisa was equivalent to 12 pies.

In 1963, mutual funds began operating in India for the first time, leading to people generating additional revenue from their investments. While the returns, termed as capital gains, are taxable, the tax on mutual funds dividends termed as Dividend Distribution Tax (DDT) is paid by the fund house or asset management company (AMC) on behalf of the investors. The emergence of Equity Linked Saving Scheme (ELSS) has further incentivised people to invest in mutual funds, since they are exempt from tax under Section 80C. To invest in mutual funds, head over to Finserv MARKETS and view the funds best suited to your goals and risk appetite.

During 1974-75, this maximum marginal rate was cut to 75%, with taxes being lowered at all levels of personal incomes.

Finance minister Y.B. Chavan eradicated income tax for those earning up to Rs. 6,000, while the marginal rate of basic income tax was kept at 70% on the income slabs over Rs. 70,000. For those covered within the highest income slab, the combined incidence of income tax and surcharge amounted to 77% of the taxable income. In 1985-86, finance minister Vishwanath Pratap Singh again restructured the taxation system and reduced the number of income tax slabs from eight to four. As the highest marginal rate of income tax on personal incomes decreased to 50% from 61.875%, those earning less than Rs. 18,000 were exempted from paying any taxes. The income tax rate was fixed at 25% for those earning between Rs. 18,001 to Rs. 25,000; at 30% for those earning between Rs. 25,001 to Rs. 50,000; at 40% for those earning between Rs. 50,001 to a lakh; while those earning upwards of Rs. 1 lakh were taxed at the rate of 50%.

In 1992-93, the income tax slabs were reduced to three by Dr. Manmohan Singh. The maximum tax rate was 40% for those earning above Rs. 1.5 lakh, while the entry rate was 20% which was applicable for people earning between Rs. 30,000 and Rs. 50,000. The middle slab was taxed at 30% for incomes ranging between Rs. 50,000 to Rs. 1 lakh. In 1994-95, tax slabs were adjusted but rates remained unchanged. The first slab was for people earning between Rs. 35,000 to 60,000, the medium slab was for those earning between Rs. 60,000 to Rs. 1.2 lakh; while those earning above Rs. 1.2 lakh were taxed at 40%.

With India’s regressive tax structure, it is infinitely better to keep a separate source of income such as through investments in mutual funds. Available on Finserv MARKETS, mutual funds can either exclusively invest in equity funds or debt funds; or a hybrid fund which invests in both equity and debt instruments. Not only will the returns from these funds supplement your income, but you can also avail tax benefits through funds under ELSS.

The Union Budget presented in 1997 was considered the ‘Dream Budget’ because it increased the limit of standard deduction to Rs. 20,000 to be applied uniformly to all salaried employees. Then Finance Minister P. Chidambaram placed an income tax rate of 10% for those earning in the range of Rs. 40,000 to Rs. 60,000, 20% for those earning between Rs. 60,000 to Rs. 1.5 lakh, and 30% for everybody earning more than Rs. 1.5 lakh. This ‘Dream Budget’ further appealed to people as it ensured that people earning a salary of Rs. 75,000 per annum and contributing 10% to the provident fund would have to pay no taxes at all.

In 2005, it was Chidambaram again who made significant changes to the tax brackets. Those earning up to Rs. 1 lakh per annum were exempted from paying taxes entirely, while those earning between Rs. 1 lakh to Rs. 1.5 lakh were taxed at 10%. An income tax rate of 20% applied to those earning between Rs. 1.5 lakh to Rs. 2.5 lakh, while those earning over Rs. 2.5 lakh would be taxed at the rate of 30%.

The Union Budget 2010-11 changed the income slabs and made everybody earning up to Rs. 1.6 lakh exempt from paying taxes. Then finance minister Pranab Mukherjee set the income tax rate at 10% for those earning between Rs. 1.6 lakh to Rs. 5 lakh, at 20% for those earning between Rs. 5 lakh to Rs. 8 lakh, and at 30% for anybody earning more than Rs. 8 lakh. By the Union Budget 2012-13, Mukherjee again increased the exemption limit to Rs. 2 lakh, and changed the income tax rate to 10% for those earning between Rs. 2 lakh and Rs. 5 lakh. Those earning between Rs. 5 lakh to Rs. 10 lakh would now be taxed at 20%, while those earning between above Rs. 10 lakh would be taxed at a rate of 30%.

The Union Budget 2014-15 saw a historic transition with passage of the Finance Bill 2015, which abolished the wealth tax. Finance minister Arun Jaitley effected a surcharge of 2% on those with a taxable income of above Rs. 10 crore. Taxpayers were thus exempted from filing a wealth tax return.

Taxation in India has always been a turbulent affair. What does not change however is the popularity and trust people place in mutual funds, which can help you in long-term wealth creation as well as to fulfill certain goal-based ambitions. Finserv MARKETS provides the best platform to invest in mutual funds, with the added appeal of zero commission fees while providing you with all the services you need to ensure a successful run in the financial market.

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