Opinion Budget tax cuts won’t cut it. It’s majority’s real incomes that drive consumption

In the latest Budget, Finance Minister Nirmala Sitharaman did one better. She made incomes up to Rs 12 lakh per annum income tax-free and incomes up to Rs 24 lakh subject to lower tax rates for all assessees filing tax returns in the new tax regime. This would mean foregoing income tax receipts of Rs 1 lakh crore.

Are these concessions good enough to woo India’s “middle class”? Will this succeed in turning around India’s wobbly consumption growth story?

India’s personal income tax structure had two big pain points. One, the tax-exemption threshold of Rs 2.5 lakh under the old scheme (Rs 3 lakh under the new scheme) was awfully low. Second, the maximum tax rate slab of 30 per cent kicked in at only Rs 10 lakh under the old scheme (Rs 15 lakh under the new scheme). This resulted in an excruciating income tax burden on the taxpayers. Finance Minister Nirmala Sitharaman took out both the pain points.

The minimum threshold has been raised to Rs 4 lakh and the 30 per cent rate-slab now kicks in at Rs 24 lakh only. This much-needed tax reform, as claimed by the Finance Minister, reduces the tax burden of taxpayers with income between Rs 8 lakh to Rs 24 lakh and above by Rs 10,000 to Rs 1.10 lakh a year. On top of it, the Finance Minister completely exempted the taxpayers with a total income of less than Rs 12 lakh by granting a rebate for the tax payable. Such taxpayers will have rebate benefits of Rs 20,000 to Rs 60,000. The combined benefits of the tax slab and rebate are claimed to range between Rs 30,000 to Rs 1.10 lakh.

So far, so good. The important associated questions are: What will be the actual benefit against what is claimed and how many people in the middle class bracket are likely to benefit?

The new slabs, rates and rebates are applicable only for the taxpayers under the new regime. Anyone who gets assessed under the new scheme does not get the benefit of many concessions and exemptions like interest paid on housing loans allowed as deduction from rental income or loss, house rent allowance, medical insurance premium, leave travel concession and the like. Therefore, only those taxpayers who claim concessions less than the reduced income tax liability will shift to the new tax regime. Of about 3 crore income tax assessees who currently opt for the old regime, not more than 50 lakh are likely to benefit from the tax bonanza announced by the Finance Minister. The extent of their benefit will also depend on the concessions/deductions they would be foregoing.

The Finance Minister’s claim of making a sacrifice of Rs 1 lakh crore by offering income tax concessions is also highly exaggerated. This is evidenced by the fact that personal income taxes are estimated to yield the government Rs 14.38 lakh crore in revenue in 2025-26, which is 21.15 per cent higher than the 2024-25 budget estimate (against estimated growth of 11.20 per cent for gross tax revenues, 6.08 per cent for corporation taxes and 10.93 per cent for Goods and Services Tax). Such high growth cannot happen when the government is making sacrifices.

Moreover, by not making the new tax slabs applicable to the assessees under the old regime, the Finance Minister did a great disservice to the 2.5-3 crore middle class taxpayers.

Fifty lakh income taxpayers likely to benefit from the relief provided by the Finance Minister in Budget 2025-26 do not make up India’s middle class. Nor is the claimed tax relief of Rs 1 lakh crore (actual impact may not be more than Rs 25,000 crore) enough to significantly add to private final consumption expenditure of Rs 200.30 lakh crore in 2024-25 (NSO; Advance GDP 2024-25 press release).

The real consumption driver is the real incomes of the people. The story is pretty bad there.

The Economic Survey 2024-25 (Table XII; page 378-379) presented the trends in real earnings of India’s labour class. Real earnings of regular wages/salaried workers, between 2017-18 and 2022-23, had reduced, for men, from Rs 12,665 per month to Rs 11,858 per month and, for women, from Rs 10,116 per month to Rs 8,855 per month. In the case of self-employed workers, it had declined from Rs 9,454 per month to Rs 8,591 per month for men and from Rs 4,348 per month to Rs 2,950 per month for women. For the unfortunate women self-employed workers, even nominal earnings had declined from Rs 5,935 per month to Rs 5,497 in this period.

The regular wage/salaried earning workers constitute approximately 20 per cent of India’s 65 crore strong workers or about 12 to 13 crore workers. Their declining real earnings cannot be compensated by the income tax concessions granted by the Finance Minister for the simple reason that most of them don’t earn enough to be amongst the taxpayers.

Certainly, the urban higher-income middle class taxpayers would feel better with the income tax concessions announced by the Finance Minister in the Budget. That, however, is only a small fraction of India’s middle class. For the vast majority of Indian people, these concessions would have no impact on their consumption standards.

The writer is former Finance and Economic Affairs Secretary