Union Budget 2025: Time ripe for a tax cut for India’s salaried class

Capital expenditure for the first eight months of FY25 contracted over 12 percent to Rs 5.1 lakh crore, solidifying concerns that the government may miss its record budgeted capex target of Rs 11.11 lakh crore.

Meanwhile, total government spending grew 3.3 percent to Rs 27.4 lakh crore, the slowest pace in a decade.

On the receipts side, income tax collections—levies on salaried individuals—have been doing the heavy lifting.

The growth in direct tax mop-up was led by a 23.5 percent surge in individual income tax collections over the eight months to November, while corporate tax receipts shrank by half a percentage point.

Experts believe that a cut in income taxes for salaried individuals could help reverse the slowdown in urban consumption while maintaining the government's fiscal targets.

"At the margin, given the slowdown in urban consumption, perhaps the only measure through which one can boost demand is by lowering the tax burden on certain sections of the public,” said Emkay Global’s lead economist Madhavi Arora.

The leading body representing the corporate sector too batted for a cut in income taxes to boost consumption and warned against sharper contractions to the fiscal deficit target. The Confederation of Indian Industry (CII) recommended reducing the marginal tax rates for personal income up to Rs 20 lakh per annum and suggested targeting a fiscal deficit of 4.5 percent in FY26 keeping in view demand conditions.

According to the fiscal consolidation path laid out in 2021, the government aims to bring the target below 4.5 percent by FY26.

Booster shot for urban consumption
According to Sandeep Sehgal, partner, tax, AKM Global, a cut in the income tax rates would provide significant relief to the common man by increasing their disposable income, and thereby spending, which would stimulate demand in key sectors such as FMCG, retail and housing.

“Such a move could play a considerable role in driving growth and revitalising the overall economy,” Sehgal added.

Indicators of urban consumption remain weak, evident from sales of passenger vehicles and the  Manufacturing Purchasing Managers’ Index.

India’s manufacturing activity closed the year at a 12-month low of 56.4 in December compared with 56.5 a month earlier, while automobile retail sales skid 12 percent on-year and 45.26 percent sequentially, indicating a demand slowdown.

This at a time when inflation, especially food prices, remained high, being in double digits for most of 2024, further weighing on consumption among India’s middle class.

Harsh Bhuta, partner, Bhuta Shah & Co., agreed that a rational cut in personal income tax could positively impact disposable incomes, which in turn could boost consumption, enhance savings and spur investments.

However, Bhutia warned that it would be equally important for tax policy changes to align with long-term fiscal sustainability goals and economic stability. Therefore, the focus should be on providing relief to middle-income earners, who form the backbone of consumption-driven growth, he said.

What to expect?
While most experts agreed that lowering the burden on India’s salaried class, especially the middle class, is crucial, they do not expect any notable reduction.

"They have tried increasing expenditure so the next step now is to embark on supply-side measures, which would involve lowering personal income taxes, especially for the lower middle classes. Having said that, they do not have enough room on the fiscal side to administer a deep cut, therefore they could go for a shallow reduction in the new income tax regime,” said Emkay Global’s Arora.

While Kumarmanglam Vijay, partner, JSA Advocates & Solicitors, advocated for a tax cut for those earning between Rs 10 lakh and Rs 15 lakh per year to spur spending among the middle class, Punit Shah, partner, Dhruva Advisors, pushed for an increase in the standard deduction to Rs 1 lakh under the new tax regime.

In the budget for 2024-25 presented in July last year, Finance Minister Nirmala Sitharaman increased the standard deduction for salaried employees opting for the new tax regime to Rs 75,000 from Rs 50,000. She also rejigged the slabs in this regime, allowing additional savings of Rs 17,500 per year.

Old versus New
The government has been sweetening the new income tax regime, which comes without the exemptions allowed under the earlier norms, in a bid to wean the salaried class from the old system.

However, experts said giving some relief to those filing returns under the older system would enable a smoother transition.

“In the last few years, concessions have been extended only to the new tax regime. However, 25 percent of the taxpayer population still relies on tax exemptions in the Income-tax Act. Hence, even though the government wants to encourage usage of the new tax regime, it would be good if it can support the 25 percent taxpayers by extending some benefit in the old regime as well and do a gradual shift. This will smoothen the pathway for change,” said Deloitte’s Raote.

Bhuta agreed that the government should not lose focus on taxpayers who prefer to save under the old tax regime. “Given that the new tax regime is now the default, any adjustments are likely to focus on making it more attractive for taxpayers. That said, the old regime continues to serve taxpayers with specific savings-oriented preferences. A parallel approach, allowing both regimes to coexist with enhancements tailored to their respective objectives, could ensure inclusivity and cater to diverse taxpayer profiles,” he said.

Sehgal, on his part, believes that the government should reorient its exemption-free approach towards the new tax regime.

“The government may consider revisiting its approach to the new tax regime by allowing certain deductions, such as losses under the head of house property, house rent allowance, and Chapter VI A deductions like 80C, 80D and 80DDB. Introducing these changes could make the new tax regime more balanced compared to the existing one, potentially easing the tax burden on taxpayers,” Sehgal said.