The announcement of the 8th Pay Commission, which will significantly increase the salaries of government employees, has sparked calls for the government to extend similar relief to private sector workers, who make up the bulk of the tax-paying middle class. There is widespread demand for tax relief in the upcoming Budget for 2025-26, which could help stimulate consumption and economic growth.
The government has already bet on reducing corporate taxes to spur investment and consumption, but this strategy has not borne the expected results. Despite corporate profits reaching a 15-year high, wages in the corporate sector have not kept pace with inflation, limiting the potential for increased consumer spending. Experts believe that the government now needs to focus on providing relief to individual taxpayers to fuel consumption-driven growth, which accounts for around 55-60% of India’s GDP.
Political analyst and commentator Amitabh Tiwari argues that immediate relief for individual taxpayers in the next budget is necessary to boost consumption. Historically, consumption-led growth has been a key economic strategy for the government. For instance, during the global financial crisis in 2008, the government introduced a higher pay commission fitment factor (1.86 instead of the recommended 1.74) to encourage spending. Similarly, the 8th Pay Commission, which will be implemented in 2026, is expected to increase government employees' pay, thereby driving higher demand and consumption in the economy.
Despite this, the middle class, which is the primary driver of consumption, has been vocal about the need for tax relief. Over the years, the income tax exemption limit has gradually increased, but the top tax bracket of 30% still kicks in at a relatively low level of ₹15 lakh, which is seen as restrictive when compared to countries like the US. This tax structure has been a source of frustration, with the middle class feeling that they are paying taxes without receiving significant benefits in return.
Amitabh Tiwari points out that while the number of people filing tax returns has grown substantially—from 3.35 crore in 2013-14 to 7.54 crore in 2023-24—the actual number of taxpayers has only slightly increased, from 1.66 crore to 2.81 crore over the same period. This is due to a significant rise in the number of people filing zero-income tax returns, which has grown from 1.69 crore to 4.73 crore in the last decade. Tiwari argues that while the government's focus on increasing the exemption limit serves socio-political goals, it does not align with the economic objectives. In many countries, there is no income tax exemption, which Tiwari believes would be a more effective approach.
In response to the demand for relief, Tiwari suggests widening the tax net and gradually raising tax slabs. This would mean that the highest tax rate of 30% would only apply to incomes of ₹50 lakh or more, rather than ₹15 lakh as it currently does. Such a change would ease the tax burden on the middle class and allow them to contribute more to consumption, which is critical for economic growth.
Kranthi Bathini, an equity strategist at WealthMills Securities, echoes this sentiment, noting that there is high anticipation that the government will revise income tax slabs in the 2025-26 Budget. He believes that increasing disposable income through tax relief will boost consumption and help drive economic growth.
In summary, while the government's focus on the 8th Pay Commission for government employees is expected to increase demand, providing tax relief to individual taxpayers—particularly the middle class—would significantly increase disposable income and stimulate consumption. This approach would align with the goal of fostering consumption-driven growth, which is crucial for India's economic future.
