Govt considers cutting income tax to boost consumption: Report

The government is reportedly considering cutting income tax for individuals making up to Rs 15 lakh per year, benefitting millions of taxpayers who dwell in urban areas. 

According to a report in Reuters that cited government sources, the upcoming Union Budget 2025-26 could provide relief to the middle class and boost consumption. As per the report the move could benefit millions if they opt for the 2020 tax system that strips exemptions like housing rentals. 

Under that system, annual income of Rs 3 lakh to Rs 15 lakh is taxed at between 5-20 per cent, with income higher than that drawing 30 per cent. As per the new tax regime, income till Rs 3 lakh attracts 0 per cent tax, followed by 5 per cent tax for the Rs 3-7 lakh bracket, 10 per cent for the Rs 7-10 lakh bracket, 15 per cent for Rs 10-12 lakh bracket, 20 per cent for the Rs 12-15 lakh bracket and 30 per cent for Rs 15 lakh and above.

Indian taxpayers now have the option to select between two distinct tax systems. The first is the legacy plan, which permits exemptions on housing rentals and insurance, providing some relief to taxpayers in these areas. The second option, introduced in 2020, features slightly lower tax rates but does not allow for major exemptions. Reducing tax could make more people choose the new system that is less complicated.

According to the report, the government has not decided on the size of any cuts. The decision would be taken closer to February 1. 

India gets a bulk of its income tax from people earning at least Rs 10 lakh, which is taxed at 30 per cent.

The Indian economy, ranked as the fifth-largest globally, experienced its slowest growth in seven quarters between July and September. Experts suggest that increasing disposable income for the middle class could potentially stimulate economic activity. However, high food inflation is adversely affecting consumer demand across various sectors, including essential items like soaps and shampoos, as well as automobiles, particularly in urban regions.

The government is under political pressure from the middle class, who are burdened by high taxes. This discontent is compounded by wage growth failing to keep pace with inflation, further straining household budgets.