The hidden tax of being Indian: why headline tax rates don’t tell the real story

India’s highest personal income tax rate, at around 42–43%, appears modest when compared with developed economies such as Denmark, where it approaches 56%. But focusing only on statutory tax rates creates a misleading picture of household finances, says chartered accountant Nitin Kaushik. “On paper, Indians pay less tax. In real life, the squeeze is often worse,” he says, arguing that taxation is only the first layer of financial pressure. “The second deduction, which nobody puts on a payslip, is debt.”

In high-tax countries such as Denmark or Sweden, Kaushik notes, taxes are closely tied to public services that significantly reduce personal spending. “Healthcare doesn’t bankrupt you, education doesn’t require EMIs, and old-age security doesn’t depend on your children,” he says. These systems lower the need for precautionary savings and borrowing. In contrast, Indian households must pay separately for schooling, medical care, insurance and even basic security after taxes are deducted. “Same income, more outflow, and far less margin for error,” Kaushik adds.

This structural strain becomes most visible in India’s urban real estate markets, particularly in Bengaluru. Luxury apartments priced at Rs 2–3 crore are selling rapidly, creating the impression of a broad-based wealth boom. Kaushik disagrees. “Anyone who looks at income tax returns regularly knows most salaried buyers are not rich — they’re leveraged,” he says. According to him, banks are often more confident about borrowers’ future salaries than the borrowers themselves.

The result is a growing cohort of households with extremely tight cash flows. “EMIs consuming 60–70% of take-home pay are becoming common,” Kaushik says, describing a pattern of “luxury towers but fragile balance sheets.” In such cases, financial resilience is thin. “One health issue, one layoff, or one market shock — and the entire structure shakes,” he warns, adding that fear of missing out is now doing more damage than inflation.

Putting numbers to the so-called Bengaluru dream highlights the problem. With average apartment prices of ₹2.5 crore or more, a home loan at roughly 9% interest translates into a monthly EMI of about ₹2–2.2 lakh. “Roughly 42% of income goes in tax first. From what remains, a large chunk goes straight to the bank,” Kaushik explains. The paradox, he says, is that disposable income can end up being lower than that of someone earning half as much but carrying no debt.

This trend, Kaushik argues, reflects credit expansion rather than genuine wealth creation. India’s household debt has risen to about 40–41% of GDP. “That number didn’t increase because everyone suddenly became richer. It increased because borrowing became normalised,” he says. His advice is blunt: “Don’t get distracted by ‘sold out’ boards. A house should reduce anxiety, not multiply it. Build net worth first — don’t just build an EMI profile.”