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The Indian government is actively considering a significant tax reduction for individuals earning up to ₹10.5 lakh annually. This potential tax cut, if implemented, would provide substantial relief to a large segment of the middle class, impacting millions of taxpayers, primarily in urban areas. The proposal is expected to be formally announced during the upcoming Budget 2025 presentation on February 1st. This decision reflects the government's proactive response to the current economic climate and the increasing concerns regarding the rising cost of living. The slowing economy, marked by a decline in GDP growth to its weakest pace in seven quarters during the July-September 2024 period, further underscores the urgency of this measure. The government aims to stimulate consumption and reinvigorate economic activity through this injection of disposable income into the hands of consumers.
Currently, under the tax regime introduced in 2020, individuals earning between ₹3 lakh and ₹10.5 lakh are subject to tax rates ranging from 5% to 20%. Incomes exceeding ₹10.5 lakh are taxed at a higher rate of 30%. Taxpayers can opt for either the traditional tax system, which offers various deductions and exemptions for expenses like housing rentals and insurance, or the newer, simplified regime introduced in 2020. The newer regime, while offering lower tax rates, eliminates most of these exemptions. The proposed tax cut is strategically designed to incentivize a larger number of taxpayers to adopt the simplified 2020 regime, streamlining the tax process and potentially offsetting any revenue loss from the reduced tax rates.
While the exact magnitude of the tax reduction remains unannounced, government sources suggest that the final decision will be made closer to the Budget 2025 announcement date. The Ministry of Finance has yet to release an official statement regarding the proposal or its potential impact on government revenue. However, the government is optimistic that the increased adoption of the streamlined tax system, resulting from the tax cut, will compensate for any decrease in revenue. This optimism is rooted in the belief that a more simplified tax structure will encourage greater compliance and efficiency within the tax system. This initiative aligns with the government's overall economic strategy, which seeks to balance fiscal responsibility with the need to support the middle class and stimulate economic growth.
The economic context is crucial in understanding the government's motivation. Rising food inflation has significantly eroded household budgets, particularly among urban populations. This has led to a decrease in demand for various goods and services, including vehicles, household items, and personal care products. The political implications of high taxes on the middle class are also a significant factor, with wage growth lagging behind inflation. The government faces increasing pressure to address the economic hardships faced by its citizens, particularly the middle class, who are often seen as the backbone of the economy. Therefore, the proposed tax relief serves as a multi-faceted approach, aiming to alleviate economic pressures, boost consumption, and address growing political concerns.
If the tax relief is implemented as proposed, it's expected to have a positive ripple effect across the Indian economy. The increased disposable income in the hands of consumers could stimulate spending and drive economic activity within the world’s fifth-largest economy. This potential economic boost is particularly relevant considering the recent slowing of GDP growth. The injection of capital into the consumer market could reignite demand and contribute to a more robust economic recovery. The success of the measure will likely depend on several factors, including the size of the tax cut and the overall economic climate. However, the government’s move demonstrates a commitment to addressing the needs of its citizens and stimulating economic growth during a period of economic uncertainty.
Source: Government may consider tax relief for incomes up to Rs 10.50 lakh: Report