Potential Income Tax Cut Of ₹15 Lakh For Salaried Individuals In Budget 2025-26. Will The Middle Class Finally Breathe Easier? 

India’s middle class might rejoice soon. The central government reportedly in the works made a huge cut for income tax of up to ₹15 lakh for personal incomes in the Union Budget for 2025-26. Such a move would drastically change the financial fate of millions of taxpayers; it would offer relief at such a time of acute need as well as contribute toward working toward the consumption stimulus needed by the slowing economy.

This being a country with two regimes-the Old Tax Regime (OTR) and the New Tax Regime (NTR)-which provide flexibility but have been criticized as being overly complex and, therefore, unfair, reducing tax rates-especially the middle-income range-could simplify taxation as well as give much-needed momentum to the economy.

But with its challenges, it brings forth this policy. The widening of the fiscal deficit, equity, and exclusion of lower income groups are some of the major points that critics have raised. With the government trying to achieve a balance between fiscal discipline and citizen welfare, such a proposal brings in broader objectives of creating a consumption-driven economy, hence placing it at the center of national interest.

News Explanation

According to recent reports, the Indian government is planning to cut income tax for individuals with annual incomes of up to ₹15 lakh. The news was first reported by Reuters, citing two unnamed government sources. Though not yet finalized, it is expected to be one of the major features of the Union Budget for 2025-26 to be presented by Finance Minister Nirmala Sitharaman on February 1, 2025.

This has attracted a lot of attention as it touches two sensitive issues: the middle class is badly in need of relief in terms of finance, and it would help the consumption-driven economy of India. Still, it remains vague how much cut in the income tax would be and how it will be implemented.

Why This Proposal Matters?

In India, the economy seems to be under a spate of challenges: high inflation and slowing growth are the major ones.” Indeed, the country has gone through weak GDP growth during the last few quarters and this has forced the RBI to come down on its growth estimates for fiscal 2025-26 from 7.2% to 6.6%.

The increased food inflation has further increased the cost burden on households. In such a situation, the reduction in income tax will go a long way in bringing relief to middle-class families. The disposable income of these families will increase and thereby their spending power, and this will go a long way in increasing demand for goods and services and consequently, economic activity.

Income Tax Scenario Today

The present income tax regime of India thus operates on two different forms, and depending upon how much the tax payers have in hand, people can choose what best suites them.

The Old Tax Regime

Under the OTR, one gets various exemptions which include rent, savings and investments, premiums of Insurance, etc. Thus despite saving taxes it is heavily loaded with a record system and compliance process.

The tax slabs under the Old Tax Regime for individuals less than 60 years are:

• Income up to ₹2.5 lakh: No tax
• ₹2.5–5 lakh: 5% tax
• ₹5–10 lakh: 20% tax
• Above ₹10 lakh: 30% tax

The New Tax Regime (NTR):

The New Tax Regime was introduced in 2020. This regime is a simpler version of taxation. So, the tax rates are less, but there are no exemptions or deductions. This tax regime is for a person who wants to calculate tax simply without too much documentation.

New Tax Regime Tax Slabs:

• First one is up to ₹3 lakh: No tax
• Second one is ₹3–7 lakh: 5% tax
• Third one is ₹7–10 lakh: 10% tax
• The fourth is ₹10–12 lakh: 15% tax
• ₹12–15 lakh: 20% tax
• Above ₹15 lakh: 30% tax

Taxpayers are at liberty to choose between Old and New Tax Regimes whichever one fits well with the taxpayers’ goals and their lifestyle.

Potential Impact of the Tax Cut

In case the government actually cuts income tax for individuals who have a source of income up to ₹15 lakh, then this will result in some long-term consequences that could both impact individuals as well as the economy:

For Taxpayers:

For instance, low taxation increases money in people’s pockets with which they can spend either on their needs, on investments, or on amusement.

Households would enjoy better means of dealing with increased costs of living-high as they are in urban locations.

In the Economy

Increased Disposable Incomes will increase their demand for goods and services, such as retail trade, automobiles, and building.

Increased spending could stimulate economic activity, creating a positive ripple effect across industries.

Though direct tax collections would naturally decline in the initial periods, the government might balance such losses with more collections on indirect taxes-again stimulated by higher consumptions.

For Businesses:

Higher consumer spending could result in increased demand for products and services, which would make the businesses expand their operations to increase employment.

Challenges and Uncertainties

While the proposed tax cut does offer a lot of benefits, it also raises a few concerns:

Income taxes will be reduced, and if revenue streams are not found elsewhere, the fiscal deficit may also be widened.

The cuts in income tax are basically those who have an income ranging between ₹7 lakh to ₹15 lakh, but the low-income bracket does not get much help in this move as most people fall below the threshold levels.

It would be challenging to implement both tax regime reforms simultaneously as it might necessitate a significant effort in terms of coordination between policymakers and tax administrators.

What’s Behind Tax Cuts?

Income taxes for personal incomes are supposedly going to be cut to ₹15 lakh. These are proposals that will drive both fiscal and social aspects. Some of these tax cuts appear to relieve pressures on families and rev up the economy.

India is a consumption-driven economy with private consumption accounting for almost 60% of the country’s GDP. However, in recent times, the country’s economic slowdown has calmed down consumer spending. That is, demand across most sectors is reduced. Therefore, if there is tax relief, disposable income to middle-class families will surge considerably and spend more money on goods and services. Rising consumption would then further propel the demand in industries such as retail, automobiles, and real estate to push the economy.

Reducing the Middle-Class Strain

Growing cost of living, in both the cities and other localities, has led to middle-class households being hard-strained in budgeting. From rising house prices to growing expenses for education, health services, and everyday products, their budgets have grown smaller to allow for some saving or extra spending. Immediate reduction in income tax will result in instant cost saving to help individuals and families allocate funds more wisely and enhance overall life standards.

Boosting Economic Recovery

Slowing Indian economy-the Reserve Bank of India cut its forecast for growth for the 2025-26 fiscal year by almost a percentage point, slashing it to 6.6% from its previous projection of 7.2%. Any tax cut is meant to boost consumer spending that could have a ripple effect-increased demand on business, higher production, better job opportunities, and even higher GDP growth rates in the long run.

At 15 years, the Indian corporate profits stand at an all-time high, but the wage of workers in the middle-income group continues to stagnate. The increasing gap between income groups has naturally raised the question of government intervention. To this effect, the government could reduce the tax burden of the middle class. In this way, it could pull and pay all the benefits of an increase in economic activities more equitably.

Background of Tax Reforms in India

Income tax in India has indeed been changed considerably in accordance with the shift in its socio-economic patterns.

• 1860: British rule initially introduced a temporary measure for the first time through income tax to recuperate losses arising from the Sepoy Mutiny
• 1961: The new Income Tax Act came into existence, thus replacing previously followed laws that established the structure of the tax code.
• 1970s: India had a very complicated tax structure, with as high as 97.75%. It had many tax slabs and steep surcharges that were quite cumbersome for the taxpayers.
• 1990s: Economic liberalization has brought significant reforms to the Indian tax system. The rates were brought down and the structure simplified to bring it at par with global standards, increasing compliance and transparency.
• 2020: The New Tax Regime (NTR) was introduced offering taxpayers a simplified system with lower rates but without exemptions and deductions. This is a shift in giving people the flexibility of choosing the tax regime of their choice, depending upon their financial situation.

It has been through these reformed systems that the aim of the government to make revenue would be balanced along with the financial well-being of the taxpayer, and this continues shaping the policies in the contemporary world.

How a Tax Cut Can Change Lives?

Cutting the income tax for people earning ₹15 lakh a year or less could mean change for many stakeholders, including those earning, the economy, and the government itself.

Gains for Individuals Earning ₹15 Lakh or Less

The largest share of India’s labour force would gain under this policy.

A tax cut would mean lower tax liabilities and, therefore, higher disposable income for individuals. They would be able to retain more of their earnings. Such extra disposable income could be used to pay off debts, save for future needs, or enhance day-to-day living standards.

With more money available, families could either send their children to more qualitative education, avail themselves of improved healthcare services, or improve their housing conditions. The reprieve would be particularly consequential for urban middle-class homes experiencing increasing cost of living.

For the Larger Economy

The benefits of an income tax cut would, however, extend beyond the specific taxpayer and may benefit the overall economy in various forms.

There would likely be greater spending by consumers as higher disposable incomes increase consumer purchasing. In addition, demand for goods may grow more within industries like retail, automotive, and real estate, leading to a growth and profitability profile.

Not all taxpayers will spend their extra income, though; some may use the money for savings or investing. This could stimulate growth in financial markets, leading to better access to capital by business enterprises.

When the demand for goods and services increases, the company may expand its operations to accommodate that demand, thereby opening more opportunities to jobs within industries and further boosting economic activities.

For the Government

Whereas a tax cut will initially reduce the direct tax revenue of the government, it can bring in some long-term benefits.

A higher spending by consumers might result in higher collections in terms of GST and other indirect taxes which can partly offset the decline in direct revenue.

Simplification of tax structures and lower rates generally tend to make compliance more high, for people do not feel as burdened and will have incomes declared more honestly. A growing economy with increased consumption and investments will, in the long run, better belong to the government’s side in terms of broader revenue streams and reduced dependence on external borrowing.

Concerns and Challenges

A mix of optimism and apprehensions has been expressed in India over the decision to decrease income tax on people having an annual earning up to ₹15 lakh. Benefits are palpable, yet a plethora of issues remain which need to be addressed by the government.

Fiscal Deficit Risks

Direct tax revenues may face a huge decline with the lowering of income taxes. This may further expand the fiscal deficit, which is already a cause for worry. In 2023-24, the estimated fiscal deficit of India was about 5.9 percent of GDP. The fiscal deficit for India was estimated at 5.9 percent of the GDP for the financial year 2023-24. Tax cutting without the provision of proper compensatory measures would tend to strain the government’s finances and thus reduce investment by the government in essential sectors, such as infrastructure, health care, and education.

Implementation Issues

The current Indian tax system functions in the form of two regimes: OTR and NTR. Introducing change in the rates of income tax or in structure across both the regimes is likely to be difficult in terms of coordination, whether it is with tax administrators, software providers, or taxpayers. Coordination may be a challenging process as it has to ensure that this transition does not result in confusion or delay the filing of returns.

Equity Issues

Critics argue that the tax cut would mainly benefit middle-income earners, excluding low-income earners, who already fall below the taxable income threshold. While these individuals may not pay direct taxes, they are often subjected to financial difficulties because of indirect taxes on goods and services. This brings about doubts regarding the equity of such a proposal and whether its needs are being fulfilled as far as the most vulnerable segments of society are concerned.

What Economists and Experts Are Saying?

The proposal has attracted a range of views from economists and financial experts, both for and against the proposals.

Views of Supporters

The strong economists and policymakers favor a reduction in income taxes as relief to the middle class from financial burden. They argue that higher disposable income will lead to more consumer spending, thus demand and economic growth.

While supporters regard tax cutting as merely one of several policy thrusts in furthering a consumption-centric economy, nearly 60 percent of Indian GDP being on private consumption would also give an impetus to spur spending as this can provide some offset for the reduced growth and soaring inflation rate.

Criticism End

Some observers suggest that the current economic slowdown may require more than just tax cuts to restore. Although they can temporarily bring in some comfort, some say that structural problems, like low private investment and unemployment, need to be matched with other measures.

Other critics point out that while tax cuts are crucial, investments in infrastructure, education, and healthcare can counterbalance them. The said areas have a deeper, sustained effect on economic growth and general development.

The Road Ahead

As the Union Budget announcement draws near on February 1, 2025, much anticipation surrounds the income tax cuts decision by the government. It will be a landmark step for the government to take, if implemented, addressing the grievances of the middle class and boosting the economy. However, it all depends on how the policy is implemented and how much the government balances fiscal discipline versus citizen welfare.

Critical Considerations for Implementation

The government needs to focus on increasing tax compliance and reducing evasion to offset the revenue loss from a tax cut. Simplifying the tax filing process and leveraging technology for better monitoring could encourage more individuals and businesses to pay their fair share.

Though the middle class would gain from reduced taxes, the government must take steps to support the poor also. Subsidies, direct cash transfers, or exemptions on essential goods and services could be given to help bridge the equity gap.

The increase in consumer spending resulting from increased disposable incomes can also benefit indirect tax collections, such as GST. The government must ensure that these benefits are well used to finance developmental projects.

Opinion: The Need for a Balanced Approach

Cutting income tax is a laudable step reflecting the concern of the government toward the issue of common people. Still, it cannot be taken as an independent solution to the Indian economic problem. There is a need for a balanced and comprehensive approach to see the optimum utilization of the benefits of this policy.

Broaden the Tax Base

India has one of the lowest tax-to-GDP ratios in the world. Encouraging greater compliance among both individual and corporate tax-payers would be necessary for this increase.

Simplify procedures for filing taxes; eliminate bureaucratic hurdles; use data analytics to detect evasion- these are some measures to increase the tax-to-GDP ratio.

Taxation must be Equitable

Although the tax cut is beneficial to middle-income earners, the government needs to address the needs of the lower-income groups as well. Targeted subsidies, exemptions on essential goods, and social welfare programs will ensure that the benefits of economic reforms are more inclusive.

Invest in Infrastructure and Public Services

The savings generated from fiscal reforms and increased tax compliance should be channeled into infrastructure development and public services. Investments in transportation, healthcare, and education create jobs, stimulate demand, and contribute to long-term growth.

Complementary Policy Measures

Tax cuts need to be reinforced by policies in support of the facilitation of private investments, easy doing business policies, and easing of structural hurdles in key sectors. Thereby making the economy hardy and resilient for sustaining long run growth.

The reduction of income tax rates for individuals up to ₹15 lakh is a significant opportunity that would help bring relief to the middle class of India by easing financial stress and would stimulate economic growth. In fact, raising disposable incomes will have an impact on consumer spending and job creation and overall revival of the economy.

However, the government faces significant challenges in deficits and in the distribution of benefits. All these have equal complications in implementation. A fair and harmonious approach backed by reforms and investment will be critical to the success of this program.

Implement it properly, and this would surely pave the way for an economy that is more robust and more equitable, better poised to promote growth and prosperity for all sections of society. February 1 will tell us if it can actually find that elusive balance between fiscal responsibility and citizen welfare: the most important turning point in India’s economic journey.