Generally, income tax systems are progressive, meaning a high income earner has to pay a higher rate. Tax systems vary from country to country; however, often tax systems contain numerous tax slabs or brackets in them. In most of the countries, the individual is categorized under a specific tax bracket according to his annual income. For each slab, the rate is different.
Example: Individual taxpayer slabs in India
• Basic exemption limit: This is the most basic amount that appears to be of income, say INR 2.5 lakhs. This is completely exempt from tax.
• Income Tax Slabs
o 5% between INR 2.5 lakhs to INR 5 lakhs
o 10%, 15%, 20% and so on. The top one is 30% for the highest income brackets.
So, for each slab of tax, it is an additive combination: that slab imposes tax on only the part of income falling within the bracket of that slab. Most tax systems also feature provisions for deduction and exemption whereby tax liability reduces taxable income through either actual reduction or through exemptions.