The forthcoming Union Budget for 2025-26 is anticipated to deliver significant tax relief to individuals earning up to Rs 15 lakh annually. These adjustments are likely to increase disposable incomes, particularly benefiting the urban middle class, where most of India’s taxpayers reside. The intention is to bolster consumer spending, thus invigorating economic activity in urban areas, which form the backbone of the country’s consumption-driven economy.
Sources within the government have hinted that it is considering revisions to the new income tax regime, which was first introduced in FY 2020-21. This tax regime has become popular with over 70% of taxpayers opting for it due to its simplicity and periodic updates that make it more attractive to middle-income earners. The current framework offers several benefits, including a tax-free income up to Rs 3 lakh, with incremental tax rates applied at higher income levels. Specifically, income between Rs 3 lakh and Rs 6 lakh is taxed at 5%, income from Rs 6 lakh to Rs 9 lakh at 10%, from Rs 9 lakh to Rs 12 lakh at 15%, from Rs 12 lakh to Rs 15 lakh at 20%, and above Rs 15 lakh at 30%. Furthermore, the tax regime includes a standard deduction of Rs 75,000, which ensures that individuals with annual incomes up to Rs 7.75 lakh are not subject to income tax.
The government’s proposed changes are likely to increase the basic exemption limit from Rs 3 lakh to Rs 4 lakh, with a corresponding upward shift in the tax slabs. For example, the 5% tax slab could be extended to include incomes ranging from Rs 4 lakh to Rs 7 lakh, which would have a direct positive impact on individuals earning in the range of Rs 10 lakh to Rs 14 lakh. This revision aims to make the tax regime more inclusive and beneficial for a larger section of the population. If implemented, this would mark a significant step toward addressing the growing income disparities and offering relief to those who are in the mid-income bracket and often feel the pinch of inflation.
The overarching goal of these reforms is to reduce the financial burden on individuals, especially those earning between Rs 13 lakh and Rs 14 lakh annually. Urban areas, where inflation is hitting hard, would stand to benefit the most. Inflation has steadily eroded the purchasing power of these individuals, making it difficult to maintain their standard of living despite earning a relatively decent income. By easing the tax burden, the government hopes to restore some of this purchasing power, thereby stimulating higher consumption in the economy.
Sudhir Kapadia, Partner at EY India Tax & Regulatory Services, has expressed his views on the matter, emphasizing that most income taxpayers reside in urban areas, where consumption is the key driver of economic activity. According to Kapadia, raising the tax slabs by Rs 1 lakh each could significantly ease the burden on taxpayers in the lower and middle-income brackets. He further pointed out that expanding the tax slabs at the lower and middle levels—especially up to the 20% tax bracket—would be a pragmatic approach, considering the current economic challenges posed by inflation. This move would not only increase disposable incomes but would also create an environment that promotes higher spending, which is critical for sustaining economic growth.
Personal income tax collections have seen a remarkable 25% increase, reaching Rs 7.41 lakh crore during the April-November period of FY25. This surge in tax revenue has bolstered the government’s fiscal position, giving it the space to implement relief measures. Unlike corporate tax receipts, which are often subject to fluctuations, personal tax receipts have consistently exceeded expectations. This is a positive indicator, as it demonstrates the government's ability to generate revenue from individual taxpayers, who form the backbone of the country’s tax base.
The increase in personal income tax revenues has provided the government with a solid foundation to introduce targeted reforms. These reforms could not only offer immediate relief to individual taxpayers but also spur wider economic activity. By reducing the tax burden on those in the mid-income group, the government is looking to increase the spending power of a significant portion of the population. This would, in turn, help address the demand slowdown witnessed in some sectors, with consumer demand being an important contributor to economic recovery.
Looking forward, the proposed changes in Budget 2025-26 could serve as a game-changer. The tax reforms would not only enhance disposable incomes but could also stimulate greater consumption, contributing to a more dynamic and sustainable economy. This would be particularly beneficial for the government, as increased consumer demand could drive job creation, improve business performance, and lead to an overall rise in tax revenues.
The government's strategy of focusing on the middle class, who are often the most affected by inflationary pressures, aligns with broader economic objectives aimed at sustaining growth and reducing income disparities. By adjusting the tax slabs and introducing other targeted measures, the government seeks to ensure that individuals in this income bracket feel more financially secure and empowered to contribute to the economy through increased spending.
If these proposed changes are adopted, the 2025-26 Budget could prove to be a watershed moment, offering much-needed tax relief to individuals and fostering a favorable environment for economic recovery. This strategy not only benefits taxpayers directly but could also provide the necessary impetus for sustained economic growth, benefiting all sectors of the economy in the long run.
