January 19 , 2013
Marginal Tax Rate is the rate of tax you pay on the last Rupee of your income. Alternately, if you had an additional Rupee added to your income for the year, this would be the tax rate on that Rupee. Your marginal tax rate would (like your average tax rate) depend on the income slab you fall in (as given in our Ready Reckoner). However, it differs from the average tax rate, in that the latter measures the ratio of tax paid to total income. Since our taxes are progressive (i.e. higher income leads to higher taxes), the marginal rate would always be higher than the average rate.
This is an important number to keep in mind, since it affects investment decisions. Let's take an example: Capital gains tax is independent of income, while income tax rate is progressive. Thus, if your marginal tax rate is higher than the capital gains tax rate, you would prefer to get income as capital gains (e.g. investing in debt funds instead of fixed deposits). The reverse is true if your marginal tax rate is lower than the capital gains tax rate.