The Indian government is reportedly considering a significant tax cut for individuals earning up to ₹10.5 lakh annually, a move that could provide substantial relief to middle-class taxpayers. This proposal, which is expected to be announced in Budget 2025 on February 1, comes at a time when the country is grappling with economic challenges, including a slowing GDP growth rate and rising living costs. The aim of this potential tax cut is to encourage consumer spending, bolster economic activity, and address the growing financial pressures faced by millions of urban taxpayers.
Under the current tax regime introduced in 2020, individuals with incomes ranging from ₹3 lakh to ₹10.5 lakh are taxed at rates between 5% and 20%, while those earning above ₹10.5 lakh face a 30% tax rate. The system offers two options: the traditional structure, which allows taxpayers to claim deductions for expenses such as housing rentals, insurance premiums, and other exemptions, and the newer tax regime, which provides lower tax rates but eliminates most of these exemptions. The proposal for a tax cut aims to encourage more people, especially those in the middle-income group, to opt for the simplified tax regime, which is perceived as more straightforward and user-friendly.
Although the specifics of the proposed tax reduction have not yet been finalized, government sources have indicated that the decision would likely be made closer to the budget presentation date. The aim is to ease the financial burden on middle-class families, many of whom are struggling with high expenses due to inflation, particularly in food prices. The cut would also align with the government’s broader strategy of stimulating domestic consumption, which has been sluggish due to rising costs and lower wage growth.
The Indian economy has been facing a tough period in recent months, with GDP growth slowing to its weakest pace in seven quarters between July and September 2024. The reduction in consumption has been particularly evident in urban areas, where rising food inflation has eroded household budgets, dampening demand for a range of goods, including automobiles, household products, and personal care items. The middle class, often seen as the backbone of India’s consumption-driven economy, has been hit hardest by the combination of stagnant wages, higher living costs, and limited tax relief.
The political ramifications of high taxes on the middle class are also becoming increasingly evident, with many citizens voicing their dissatisfaction over the lack of sufficient tax relief. If implemented, the proposed tax cut could offer relief by putting more disposable income in the hands of middle-class consumers, potentially helping to reverse the decline in consumer spending. The move could also help alleviate some of the political pressure the government faces due to public discontent over rising taxes and the perceived widening gap between wage growth and inflation.
The idea of tax cuts for the middle class comes at a time when other prominent business figures, such as Infosys co-founder Narayana Murthy, have sparked debates on the issue of work-life balance and the need for Indians to work longer hours to help the nation progress. Murthy had previously suggested that Indians should work 70 hours a week to drive national growth, which ignited controversy. While these discussions continue, the proposal to reduce taxes could provide a counterbalance, showing that the government is aware of the economic strains faced by workers and is willing to take steps to improve the financial well-being of its citizens.
At this stage, the finance ministry has not yet commented on the potential impact of this proposal on government revenue or fiscal policies. However, some sources suggest that the reduction in tax rates could be offset by a rise in adoption of the simplified 2020 tax regime, thus making up for the revenue losses from the tax cuts. Given the ongoing economic slowdown, the government’s ability to stimulate domestic demand is critical to maintaining the country's position as the world’s fifth-largest economy.
In conclusion, if implemented, the proposed tax cuts could be a major step toward improving the financial situation of millions of middle-class taxpayers in India. By easing their tax burden and increasing disposable income, the government could provide much-needed support for consumption-driven sectors, helping to spur economic activity in the country. The move could also signal the government’s commitment to addressing the growing concerns of the middle class, whose financial stability plays a crucial role in India's long-term economic growth.
