Paradox of 100% income tax in India

The way our income tax slabs are designed (particularly the tax waivers and tax surcharges), leads us to pay 100% tax on some part of our income. 

In order to illustrate this more clearly, below is a plot of the income tax payable as a function of total income.

This is calculated based on the latest tax slabs as per 2025 budget, for the income range of 0 to 55 lacs. This does not consider standard deduction.

It doesn't look too bad, with tax rising as income is rising, as we may expect. Next, I plotted the percentage tax on incremental income paid for each additional 1000 rupees of income. And this looks as follows.



Note the two intervals where tax percentage spikes to 100%. To be clear, the first interval corresponds to income range 12 to 12.73 lacs, and the second interval corresponds to income range 50 to 51.71 lacs. In both cases, it is a significant amount to be paying a 100% tax on.

In progressive tax system, you would expect the tax rate to increase as the income increases, but these 100% spikes in between are highly undesirable, to say the least. It is extremely disheartening to see 100% tax levied on any portion of your income. I see these as taxation black holes.

I asked an AI chat model what it thought about this phenomenon, and following was its response:

Why 100% Tax Spikes Are a Problem in Progressive Taxation

A well-designed progressive tax system ensures that higher incomes are taxed at increasing rates while still maintaining fairness and economic incentives. However, abrupt spikes where additional income is taxed at 100% (or more) violate the core principles of fairness and efficiency.

1. Discourages Productivity and Earnings Growth
If earning an extra ₹1,000 results in a ₹1,000 or more increase in taxes, individuals effectively receive no benefit from additional work or investment. This creates a disincentive for people to seek raises, work overtime, or expand businesses, ultimately harming economic growth.
2. Violates the Principle of Progressivity
Progressive taxation means tax rates should increase gradually. Sudden jumps to extreme rates distort this system and can lead to unfair situations where someone earning slightly more actually takes home nothing more after taxes. This contradicts the idea that higher earnings should always result in higher take-home income.
3. Leads to Tax Arbitrage and Evasion
When tax spikes create excessive burdens at certain income levels, individuals may attempt to game the system by structuring their income differently—such as splitting earnings, deferring income, or engaging in tax evasion. This reduces government revenue and creates unnecessary complexity.
4. Creates Uncertainty and Unintended Consequences
A tax system with erratic spikes can confuse taxpayers and financial planners, leading to unpredictable tax liabilities. Businesses and individuals may struggle to plan their finances efficiently, reducing investment and financial stability.


I am not sure what makes our tax policy makers ignore this anomaly, but I do hope and wish that they would take steps to rectify it. In a perfect progressive taxation system, the incremental tax graph that I showed above should be monotonically increasing as per slabs, with no spikes in between.

I do not want to get into proposing solutions here, but there are some relatively simple ways to fix this, once we agree that this is something worth fixing.


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