Key Highlights
- Potential tax relief under consideration for incomes up to ₹10.5 lakh.
- Aims to boost consumption and ease the strain of rising living costs amid a slowing economy.
- Expected announcement in Budget 2025 on February 1.
The Plan
The Indian government is reportedly planning to introduce a tax cut for middle-class taxpayers earning up to ₹10.5 lakh annually. If implemented, this move could benefit millions, particularly urban taxpayers struggling with high living costs.
Under the current tax regime, introduced in 2020, incomes between ₹3 lakh and ₹10.5 lakh are taxed at rates of 5% to 20%, while those earning above ₹10.5 lakh are taxed at 30%. The proposed change could lower the tax burden for a significant segment of earners, potentially boosting disposable income.
Dual Tax Regime
India’s taxation system allows individuals to choose between:
- Traditional Regime: Offers exemptions on expenses like housing rent and insurance.
- New Regime (2020): Features lower tax rates but removes most exemptions.
The anticipated tax relief is aimed at increasing adoption of the simplified 2020 regime, encouraging more taxpayers to switch.
Economic Context
The proposal comes at a time of economic challenges:
- GDP growth has slowed to its weakest pace in seven quarters (July-September 2024).
- Rising food inflation is squeezing household budgets, dampening demand for consumer goods.
High taxes coupled with slow wage growth have added to public dissatisfaction, particularly among middle-class voters.
Political Implications
As Budget 2025 approaches, addressing middle-class concerns is crucial for the government ahead of elections. By reducing tax rates, the government hopes to:
- Relieve financial pressures on households.
- Stimulate economic activity in sectors like retail, personal care, and transportation.
Challenges Ahead
The finance ministry is weighing the impact on revenue from potential tax cuts. However, sources suggest that increased adoption of the simplified tax regime could offset short-term revenue losses. The final decision on the reduction size will likely be taken closer to the budget announcement.
Conclusion
If approved, the tax relief for incomes up to ₹10.5 lakh could provide much-needed respite to middle-class taxpayers, support consumer spending, and help revive India’s economic growth. Budget 2025 could mark a significant step toward addressing fiscal pressures while securing political goodwill.
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