Sources suggest that reducing personal income tax in the budget could spur consumption and increase savings among the middle class.
In a bid to boost consumption, the Indian government is considering a reduction in income tax rates in the budget 2024 for certain income brackets, according to two government sources cited by Reuters. This announcement is expected to be made in July when Prime Minister Narendra Modi’s administration presents the budget, following the Bharatiya Janata Party (BJP)’s failure to secure a majority on its own.
A post-election survey highlighted voter concerns over inflation, unemployment, and declining incomes. This is corroborated by the Reserve Bank of India’s (RBI) household inflation expectations survey, which forecasts a 20 basis points (bps) increase in inflation over the next three months and a 10 bps rise over the next year.
Despite the Indian economy growing at a remarkable 8.2% in 2023-24, consumption only saw a growth rate of about half that pace. Prime Minister Modi, asserting his claim to form the National Democratic Alliance government, emphasized a commitment to enhancing middle-class savings and improving their quality of life.
Sources suggest that reducing personal income tax could spur consumption and increase savings among the middle class. Those earning over ₹15 lakh annually might see some tax relief, though the specific thresholds are still under discussion. The potential changes could amend the 2020 tax scheme, where income up to ₹15 lakh is taxed at 5%-20%, and income over ₹17 lakh is taxed at 30%.
Currently, the personal tax rate significantly jumps from 5% to 30% when income increases from ₹3 lakh to ₹15 lakh, a steep progression noted by the second source. The government is also exploring lower personal tax rates for those earning ₹10 lakh annually, with discussions ongoing about a new threshold for the highest tax rate of 30% under the old system.
The anticipated loss in tax revenue from these cuts could be partially offset by increased consumption among higher earners. The federal government aims for a fiscal deficit target of 5.1% of GDP for the fiscal year 2024-25.
This potential tax relief aligns with the Confederation of Indian Industry (CII) president Sanjiv Puri’s recent remarks to PTI, suggesting that relief for the lowest income tax slab is likely due to the prevailing high inflation levels.
Stay tuned for more updates as the government finalizes the budget details.
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