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IAI Actuarial Core Principles · Business Finance · Personal and corporate taxation

Under India's personal income tax system, which of the following best describes the difference between a progressive slab structure and a flat-rate structure for an individual taxpayer?

A progressive structure applies higher rates to successive bands of income, so the average rate rises as income grows while remaining below the marginal rate. Only income inside each band bears that band's rate; the entire income is not taxed at the top rate.

  1. AIn a progressive structure, the rate applied to each successive band of income rises, so the average rate increases with incomeCorrect
  2. BIn a progressive structure, the entire income is taxed at the highest slab rate reached
  3. CIn a flat-rate structure, the rate rises automatically as income rises
  4. DIn a progressive structure, the average rate is always equal to the marginal rate
  5. In a flat-rate structure, the average rate falls as income rises because of the slabs

Explanation

A progressive system taxes successive bands at rising rates, so only income within a band bears that band's rate. The average rate therefore rises with income but stays below the marginal rate. Taxing the whole income at the top rate describes a cliff system, not slabs.

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