Government considers income tax cut to boost consumption: report

The government is reportedly considering reducing income tax for individuals earning up to Rs 15 lakh annually, benefiting millions of taxpayers living in urban areas.

According to a report published by Reuters citing government sources, the upcoming Union Budget 2025-26 could provide relief to the middle class and boost consumption. According to the report, the move could benefit millions if they opt for the 2020 tax system that eliminates exemptions such as housing rentals.

Under this system, annual income between Rs 3,000 and Rs 15,000 is taxed at a rate of between 5 and 20 per cent, with income above that withdrawing 30 per cent. As per the new tax regime, income up to Rs 3 lakh attracts 0 per cent tax, followed by 5 per cent tax for the Rs 3 to 7 lakh category, 10 per cent for the Rs 7 to 10 lakh category and 15 per cent for the Rs 7 to 10 lakh category. Rs 10-12 lakh bracket, 20 per cent for Rs 12-15 lakh bracket and 30 per cent for Rs 15 lakh and above bracket.

Indian taxpayers now have the option to choose between two different tax regimes. The first is the old plan, which allows exemptions on housing rentals and insurance, providing some relief to taxpayers in these areas. The second option, introduced in 2020, has slightly lower tax rates but does not allow significant exemptions. Reducing taxes could make more people choose the new, less complex system.

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

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

The Indian economy, ranked the fifth largest in the world, witnessed its slowest growth in seven quarters between July and September. Experts point out that increasing the disposable income of the middle class can stimulate economic activity. However, high food price inflation is negatively impacting consumer demand in various sectors, including basic items such as soap and shampoo, as well as automobiles, especially in urban areas.

The government is subject to political pressure from the middle class, which is burdened by high taxes. This discontent is exacerbated by the failure of wage growth to keep pace with inflation, increasing pressure on household budgets.