What is Maximum Marginal Rate in Income Tax?

The maximum marginal rate in income tax refers to the highest percentage of tax applied to the income earned belonging to the highest tax bracket. However, it’s essential to recognize that not all income is taxed at the maximum marginal rate. Instead, only the portion of income that falls within the highest tax bracket is subject to this rate. 

Maximum Marginal Rate (MMR):
Every person who earns any kind of Income is required to pay tax on such income subject to the provisions of Income Tax Act, 1961. Tax rates in Income Tax Act are framed in such a way that a person earning lower income will pay comparatively lower amount of Income Tax than a person earning income higher than him. Calculation of Tax not only include amount of income tax but also education cess or surcharges wherever applicable.

Marginal rate of tax is applicable to all types of incomes of taxpayers. However, there are certain instances where specified persons will have to pay maximum tax that is mentioned in the income tax act.

Section 2(29C) of the Income Tax Act,1961, defines “maximum marginal rate”  as the rate of income tax (including surcharge on income tax) applicable in relation to the highest slab of income in case of individual, association of persons or, as the case may be body of individuals as specified in the finance act of the relevant assessment year.

To whom MMR is applicable?:
It is important for financial planning to know what amount of tax a person is liable to pay. The maximum marginal rate of tax is typically applicable to individuals with the highest incomes. In India, the income tax structure consists of different slabs, with tax rates increasing progressively as income rises. Individuals falling within the highest income bracket are subject to the maximum marginal rate of tax. In certain cases, like in the case of trust of an Association of person, income is required to be taxed at the maximum marginal rate, which means there will be no exception limit or slab rate. The assessment of the members of AOP or BOI depends on whether they are eligible to be charged tax at the maximum marginal rate or not at all. If AOP or BOI are chargeable to tax at a maximum marginal rate or any higher rate, then the share of profit of a member is exempt from tax. Therefore, it is not to be included in the total income of the member as per provisions of Section 86(a) of income tax act.

How to calculate MMR?:
Let us understand how MMR is calculated. As per lates Budget update of FY 2023, rates of surcharges are changed and the same will have an impact on Maximum marginal rates of tax.

Highest rate of tax as per slab rate – 30%

Cess applied on the tax amount – 4%

30*4% = 1.2

This comes to 31.2%

Now as per latest Budget update surcharge at the rate of 15% will be applied.

31.2*12%=7.8

Therefore, 31.2+7.8 comes to 39% being the current Maximum marginal rate applied to the taxpayer subject to the provisions of income tax.

Conclusion:
It’s important to note that the specific income thresholds and tax rates may vary from year to year based on changes in tax laws, budgetary provisions, and government policies. MMR is not a tax rate applied to every individual as it completely depends on the income slabs of every person mentioned in income tax act. However, currently due to changes in rates of surcharge has reduced the amount of Maximum Marginal rate of Tax.

About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.