When you look at headlines about the income tax rate in India, especially the top bracket with over 42% for ultra-high earners, it can be very easy to conclude that taxes are severely high. At the same time, middle-class taxpayers hear about frequent changes in slabs and regimes and can feel squeezed from all sides. The reality, however, is more nuanced. When you dig into slabs, rebates, and how other countries tax income, the real picture may look different from the usual narrative of India overtaxing it citizens.
Understanding income tax as a direct tax
Income tax is a kind of direct tax. That means it is charged straight on your income, unlike GST, which is built into the price of what you buy. Because you see direct tax deducted from your salary or paid through advance tax, the ‘pain’ may feel very real and immediate.
Your perception of whether tax feels ‘high’ depends on three things
- How much you earn and which income tax slab you fall under
- Whether you choose the old or new regime
- How efficiently you use tax-saving options, such as life insurance policies, ULIP, and tax-saving fixed deposits
Without planning, even a moderate-value income tax rate in India can feel punishing.
How the current income tax slab structure works**
Under the latest new-regime income tax slab for FY 2025-26 (AY 2026-27) –
- Income up to ₹4 lakh is tax-free
- From ₹4 lakh to ₹8 lakh, the rate is 5%
- From ₹8 lakh to ₹12 lakh, it is 10%
- From ₹12 lakh to ₹16 lakh, it is 15%
- From ₹16 lakh to ₹20 lakh, it is 20%
- From ₹20 lakh to ₹24 lakh, it is 25%
- Income above ₹24 lakh is taxed at 30%.
One also gets a standard deduction and a generous rebate under section 87A in the new regime. For many salaried individuals, this means zero tax liability up to a fairly comfortable income level (if your total income stays within the rebate threshold). In the old regime, income tax slab rates look steeper, but you get a range of deductions and exemptions, including sections 80C, 80D and housing-linked benefits.
So, if you only look at slab percentages on paper, you underestimate how much these rebates and deductions soften the actual burden.
How does the income tax rate in India compare with other countries?
The highest income tax rate in India (including surcharge and cess) for very high incomes above ₹5 crore is about 42.7%. That sounds harsh until you compare it with many advanced economies, where top rates are even higher. Several countries, including Canada, the United States, the United Kingdom and parts of Europe, impose effective top rates above 45–50% on high earners.
In other words, India is not an outlier on the extreme high side. It sits roughly in the middle of the global pack for top-end taxation. Also, remember that only a tiny fraction of the population ever touches the highest slab. For most middle-income earners who use rebates sensibly, the effective rate is much lower than the highest income tax rate in India.
Where India struggles at is not just the rate but the feeling that you do not get enough visible social security in return for your direct tax outgo. That is altogether a different problem from the rate itself.
How life insurance policies and ULIPs change your effective tax burden**
If you opt for the old regime, certain life insurance policies still play a powerful role in reducing your tax bill. Premiums for eligible life insurance policies qualify for deduction under section 80C within the overall limit, alongside EPF, ELSS, and other instruments. The maturity proceeds of qualifying policies also enjoy favourable tax treatment when conditions are met.
A ULIP sits at the intersection of insurance and investment. Traditional ULIP products offer market-linked growth with life cover, and, for qualifying policies, the premium, and in some cases, the proceeds, receive tax benefits under sections 80C and 10(10D), subject to the latest limits and rules. This means a well-chosen ULIP does two jobs at once, providing protection for your family while helping lower your taxable income in the old regime.
If you compare your tax outgo before and after using life insurance policies and a suitable ULIP, your effective rate on the same gross income drops meaningfully. The slab you fall under has not changed, but your taxable base has shrunk.
Once you put everything together, the answer is clear. On paper, the income tax rate in India for top earners looks high, especially once surcharges are added. For the majority, though, the combination of widened new-regime slabs, rebates up to a decent income level, and old-regime deductions through life insurance policies, ULIP and tax-saving fixed deposits, can keep the effective burden closer to moderate territory than to extreme.
** Tax exemptions are as per applicable tax laws from time to time.
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