As per Section 2(10) of the Income Tax Act, 1961, unless the context otherwise requires, the term “Average Rate of Income-tax” has the following Meaning/ Definition:
Section 2(10) of the Income Tax Act, 1961
“Average Rate of Income-tax” means the rate arrived at by dividing the amount of income-tax calculated on the total income, by such total income.
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In India, the Average Rate of Income Tax (ARIT) is an integral part of the structure of the income tax rates. The ARIT is calculated based on total tax liability which is due on the total taxable income generated by a taxpayer.
ARIT helps in certain complex cases of tax computation, in order to maximise the amount of deductions or exemptions that can be availed under the income tax to reduce the tax burden in due course.
ARIT is is also an important parameter for the Indian government to assess the effectiveness of the taxation system, as the same helps in allocating the taxes in a fair and equitable manner and revising the prevalent tax rates as per budgetary needs.