A marginal tax rate applies to the next slice
In a progressive tax structure, different portions of taxable income can face different rates. A higher bracket usually applies only to the portion entering it. In a hypothetical system with the first ₹100 untaxed and the next ₹100 taxed at 10%, tax on ₹200 is ₹10, not ₹20.
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Separate the top rate from the average
A marginal rate is the rate applying to an additional unit of taxable income within a bracket. An effective rate compares the total tax with the income measure being used.
Take a fictional two-bracket system:
- The first ₹100 is taxed at 0%.
- The next ₹100 is taxed at 10%.
Someone with ₹200 of taxable income owes ₹10. Their marginal rate is 10%, while their effective rate on that ₹200 is 5%.
Earning another ₹10 within the same bracket adds ₹1 of tax in this simplified system. It does not retrospectively apply 10% to the first ₹100. Real systems may include deductions, credits, rebates or other rules, so this invented example explains the bracket mechanism rather than any country's actual tax bill.