Although the government has not finalized the exact reductions, sources suggest that the decision will be made closer to the budget date.
Budget 2025: The Indian government is reportedly deliberating a significant tax relief for individuals earning up to Rs 10.5 lakh annually, a move expected to provide substantial financial relief to middle-class taxpayers. The proposal, likely to be announced in the Budget 2025 on February 1, is aimed at boosting consumption and mitigating the rising cost of living amidst an economic slowdown, according to sources cited in a Reuters report.
Current Tax Regime and Challenges
Under the current tax regime introduced in 2020, annual incomes between Rs 3 lakh and Rs 10.5 lakh are taxed at rates ranging from 5% to 20%, while incomes exceeding Rs 10.5 lakh are subject to a 30% tax rate. Taxpayers can opt for either the traditional system, which allows exemptions for expenses such as housing rentals and insurance, or the newer regime, which offers lower tax rates but eliminates most exemptions.
The traditional tax system has been preferred by many due to its allowances for deductions, but the newer system introduced in 2020 has gained traction for its simplicity and reduced rates. However, the rising inflation and high living costs have amplified demands for additional relief, particularly for the urban middle class grappling with eroding household budgets.
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Proposed Tax Relief: A Game-Changer?
The proposed tax cut is expected to encourage more individuals to shift to the simplified 2020 regime by making it more attractive. Although the government has not finalized the exact reductions, sources suggest that the decision will be made closer to the budget date.
By lowering the tax burden for those earning up to Rs 10.5 lakh, the government aims to put more disposable income in the hands of consumers, potentially revitalizing demand in key sectors such as automobiles, consumer goods, and personal care products. This move could be particularly impactful in urban areas, where rising expenses have dampened purchasing power.
Addressing Economic Concerns
India is navigating a challenging economic landscape, with GDP growth slowing to its weakest pace in seven quarters between July and September 2024. Rising food inflation has further strained household budgets, leaving consumers with limited spending capacity. A reduction in tax rates could help offset these pressures by providing immediate financial relief to millions of taxpayers.
Additionally, the proposed measure could have political implications, addressing middle-class discontent over high taxes and wage growth that has not kept pace with inflation. By offering tangible relief, the government could bolster its appeal ahead of the 2024 general elections.
Potential Impact on Revenue
Critics have raised concerns about the potential impact of tax cuts on government revenue. However, some experts argue that reducing tax rates could drive higher adoption of the streamlined tax regime, potentially offsetting revenue losses through improved compliance and broader participation.
The finance ministry has yet to comment on the proposal or its anticipated effects. Nonetheless, the focus remains on stimulating economic activity in the world’s fifth-largest economy and addressing the financial strains faced by millions of taxpayers.
Conclusion
If implemented, the proposed tax relief for incomes up to Rs 10.5 lakh could serve as a much-needed boost for India’s slowing economy. By enhancing disposable income, the measure could invigorate consumer spending, stimulate key industries, and alleviate the financial burden on middle-class households. As the nation awaits the Budget 2025 announcement, all eyes are on the government to deliver a balanced solution that addresses economic challenges while fostering growth and equity.
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