The government is reportedly considering cutting income tax for people earning up to Rs 15 lakh a year, benefiting millions of taxpayers living in urban areas.
According to a Reuters report 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 into the 2020 tax system, which eliminates exemptions such as home rentals.
Under the system, annual income between Rs 3 lakh and Rs 15 lakh is taxed at 5-20 per cent, and income above that is 30 per cent. According to the new tax system, 0 percent tax on income up to Rs.3 lakh, 5 percent tax for Rs.3-7 lakh bracket, 10 percent tax for Rs.7-10 lakh bracket, Rs. 10-12 lakh bracket, 20 per cent for Rs 12-15 lakh bracket and 30 per cent for Rs 15 lakh and above.
Indian taxpayers now have the option of choosing between two different tax regimes. The first is the Legacy Plan, which allows exemptions for house rentals and insurance, giving some relief to taxpayers in these areas. The second option, introduced in 2020, features slightly lower tax rates, but does not allow for large exemptions. By lowering taxes, more people can choose the less complicated new system.
According to the report, the government has not decided on the extent of any cuts. The decision will be made around February 1.
India collects most of its income tax from individuals earning at least Rs 10 lakh, which is taxed at 30 percent.
India's economy, ranked 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 can stimulate economic activity. However, high food inflation adversely affects consumer demand across various sectors, including essential items such as soap and shampoo as well as automobiles, especially in urban areas.
The government has come under political pressure from the middle class people who are burdened by heavy taxes. This dissatisfaction is compounded by wage growth failing to keep pace with inflation, further straining household budgets.