The Unequal Tax Burden: Why Income Tax Rates Differ

But in reality, not everyone with the same income pays the same amount of tax. Things like where your money comes from, the deductions you can claim, or even where you live in India can make a big difference. Let’s break down why this happens and how it creates an unequal tax burden

Why Do Tax Rates Differ?

1. Income Tax Slabs and Progressive Rates

   In India, income tax is divided into slabs based on how much you earn. For example, in the new tax regime (as of 2025), the tax slabs for individuals under 60 years are:

   • Up to ₹3,00,000: No tax
   • ₹3,00,001 to ₹7,00,000: 5%
   • ₹7,00,001 to ₹10,00,000: 10%
   • ₹10,00,001 to ₹12,00,000: 15%
   • ₹12,00,001 to ₹15,00,000: 20%
   • Above ₹15,00,000: 30%

   This means if you earn ₹5 lakh, you pay 5% on the amount above ₹3 lakh. But if you earn ₹20 lakh, you pay higher rates on the higher slabs. This system is meant to be fair, but it can feel heavy for middle-class earners who don’t get many tax breaks.

   The old tax regime allows more deductions but has different slabs, which can make things confusing. Choosing between the old and new regimes also affects how much tax you pay.

2. Deductions and Exemptions

   One big reason for unequal taxes is deductions and exemptions. These are ways to reduce your taxable income. For example:

   • House Rent Allowance (HRA): If you live in a rented house, you can claim HRA to lower your taxes (only in the old regime).
   • Section 80C: You can save up to ₹1.5 lakh by investing in things like life insurance, PPF, or school fees (old regime).
   • Medical insurance (Section 80D): Premiums paid for health insurance can reduce your tax by up to ₹25,000 (or ₹50,000 for senior citizens).

   People who know about these deductions or hire tax experts (like CAs) often pay less tax. Wealthy individuals can claim bigger deductions, like those for business expenses or home loans. But low- or middle-income earners may not have enough savings or knowledge to use these benefits, so they end up paying more tax compared to their income.

3. Different Types of Income

   Not all income is taxed the same way. In India:

   • Salary income is taxed as per the slabs mentioned above.
   • Capital gains (money from selling property or stocks) are taxed differently. For example:
     • Long-term capital gains on stocks or mutual funds (held over a year) are taxed at 12.5% (above ₹1.25 lakh).
     • Short-term capital gains on stocks are taxed at 20%.
   • Interest income (from savings accounts or fixed deposits) is taxed at your slab rate, but some exemptions like ₹10,000 on savings account interest apply.

   Wealthy people often earn more from investments (like stocks or property), which are taxed at lower rates. A salaried person earning ₹10 lakh might pay more tax than someone earning the same amount from investments. This creates an unequal burden.

4. Jobs and Industries

   Your job can also affect your taxes. For example:

   • Self-employed people (like freelancers or shop owners) can deduct business expenses, like rent for a shop or travel costs.
   • Farmers often don’t pay income tax on agricultural income, which is a big advantage.
   • Startup employees might get stock options, which are taxed at lower rates when sold.

   If you’re a salaried employee, you might not have as many ways to reduce your taxes compared to someone running their own business. This makes the tax system feel unfair.

5. Where You Live in India

   Your location can change your tax burden. While there’s no state income tax in India (unlike some countries), where you live affects your cost of living and deductions.

   For example:–

   • If you live in a metro city like Mumbai or Delhi, you can claim a higher HRA exemption compared to someone in a smaller town.
   • People in high-cost cities might spend more on rent or loans, which gives them bigger deductions.
   • Also, some regions like Sikkim have special tax rules, where residents pay lower taxes under certain conditions. This means two people earning the same salary in different places might pay different taxes.

How Does This Affect People?

1. Wealth Gaps and Fairness

   The tax system is supposed to make things fairer by taxing richer people more. But when wealthy individuals use deductions or earn income from investments taxed at lower rates, they often pay less than expected. This can make the gap between rich and poor wider, as middle-class families bear a heavier burden.

2. Economic Choices

   Taxes affect how people spend or save. For example:-

   • Lower taxes on capital gains encourage people to invest in stocks or property.
   • High taxes on salaries might discourage people from working overtime or taking higher-paying jobs.

   If the system favors certain types of income, it can push people toward those instead of regular jobs, which isn’t always good for the economy.

3. Tax Avoidance

   Complex tax rules make it easier for some people to avoid taxes legally. Wealthy individuals or companies might hire experts to find loopholes or move money to places with lower taxes. Ordinary people don’t have the resources to do this, so they end up paying more.

Ideas for a Fairer Tax System

To make taxes more equal, India could:

• Simplify the tax system: Make rules easier to understand and reduce the number of deductions.
• Tax all income fairly: Charge similar rates for salaries and investments.
• Help lower-income families: Increase tax credits or exemptions for people who earn less.
• Close loopholes: Stop wealthy people from using tricks to avoid taxes

The goal is to make the system fair, clear, and easy for everyone to follow.