As the Union Budget 2026 draws closer, the debate over India’s steep personal income tax structure is once again in focus. For high-income individuals, the effective tax outgo can climb “as high as 42.7%”, making India one of the higher-tax jurisdictions for personal income when surcharge and cess are factored in.
While recent budgets have offered relief to middle-income taxpayers, experts argue that moderate slab rates for high earners remain largely untouched, even as this small group continues to shoulder a disproportionate share of direct tax collections.
How India’s peak tax rate touches 42.7%
Under the old tax regime, individuals earning above Rs 5 crore attract:
Base tax rate: 30%
Surcharge: 37%
Health & education cess: 4%
This takes the effective tax rate to around 42.7%, one of the highest marginal rates for individuals in India’s tax history.
The new tax regime, while offering lower base rates and more slabs, still levies a 25% surcharge on income above Rs 2 crore, resulting in an effective tax rate of nearly 39% for top earners.
Despite some rationalisation in surcharge in recent years, the absolute tax burden for high-income individuals remains elevated.
Why high taxes are hurting consumption
As India heads into Budget 2026, the broader question is whether this structure is hurting consumption, investment and economic momentum.
Deepesh Chheda, Partner, Dhruva Advisors, points out that for individuals earning more than Rs 5 crore, the effective tax rate on regular income can rise to nearly 39%, after accounting for surcharge and cess. In standard salaried or professional income cases, this sharply reduces take-home pay. Lower post-tax income directly affects purchasing power, especially at a time when private consumption remains a key driver of growth.
He also flags the impact of recent changes in taxation rules. According to him, earlier, buyback proceeds were largely tax-free in the hands of shareholders, but under the new regime, the same income is now taxed as dividend income at rates of up to 35%. While gross income remains unchanged, the higher tax outgo leaves individuals with significantly less money to spend or reinvest, affecting capital markets and investor sentiment over time.
Global comparison: Taxes vs public services
While several developed economies also levy high marginal tax rates, Chheda highlights a key difference — what taxpayers receive in return. In advanced economies, higher taxes often translate into free or subsidised healthcare, quality education, public transport and social security. In India, however, taxpayers continue to incur significant out-of-pocket expenses despite high taxes, raising concerns about value for money for compliant taxpayers.
Brain drain and certainty concerns
Echoing similar concerns, Ashish Mehta, Partner at Khaitan & Co, says peak income tax slab rates in India for high income earners can go up to 42.7% and are much steeper compared to several other jurisdictions. He notes that while India’s redistributive tax model reflects the country’s development needs, the pressure on a narrow taxpayer base has led to brain drain and asset migration in recent years.
Mehta also draws attention to the contrast with corporate taxation. He points out that the 25% corporate tax rate — and 15% for certain manufacturing companies — has been widely appreciated by businesses, suggesting that similar certainty and moderation are needed in personal tax slabs as well.
What Budget 2026 could do
Experts agree that sustainable revenue growth cannot rely solely on taxing a small, compliant group of individuals. Instead, the focus should be on:
Moderating personal tax slabs for high earners
Widening the tax base using technology and analytics
Simplifying compliance and improving transparency in government spending
As Chheda notes, over-taxing a narrow base risks weakening the consumption-investment cycle. Encouraging broader participation in the formal economy may ultimately generate more durable growth than extracting higher taxes from the same set of taxpayers.
With Budget 2026 approaching, the key question remains: Will the government rebalance the tax framework to protect growth while maintaining fiscal discipline?