Budget 2025 | Tax breaks to spur spending, boost economy?

The Centre is also likely to keep its capital expenditure at elevated levels as it leads to immediate demand creation in the economy.  (Mint)
The Centre is also likely to keep its capital expenditure at elevated levels as it leads to immediate demand creation in the economy. (Mint)

Summary

  • While stability in the tax regime is a virtue that the government prefers, modifying the new tax regime again after last year’s revision, that too in the early years of its third term in office, shows the urgency to stimulate consumption demand.

New Delhi: Finance minister Nirmala Sitharaman is likely to offer income tax breaks for individuals in the Union budget for FY26 as part of efforts to boost household spending and stimulate economic growth, two persons informed about discussions in the government said.

While the exact changes to the new personal income tax regime will be finalized over the next few days, discussions are currently on to increase the standard deduction for individuals which was last revised to 75,000 in the July 2024 budget, further raise the basic tax exemption limit from 3 lakh, and to rework the tax structure for personal income up to 12-15 lakh, one of the persons quoted above said.

This will require reworking the 20% tax slab, in which currently those with 12-15 lakh income fall, the lower ones and adopt any consequential changes, the person said, adding that this revamp of the new personal income tax structure is expected to benefit everyone opting for it.

Discussions are on at the highest level and the extent of relief to be given will be finalized shortly, a second person said, also on the condition of not being named.

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At present, those with 3-7 lakh income pay 5% tax in the new personal income tax regime, while those in 7-10 lakh category pay 10% and those in the 10-12 lakh pay 15%. Those with 10-15 lakh pay 20% and income above this attracts 30%, as per the revised structure rolled out in the July 2024 budget.

The bold move to revamp the individual income tax regime comes at a time economic growth is expected to moderate to 6.4% in the current financial year, below the post-pandemic average of 8.3% seen in the preceding three financial years.

Industry bodies Confederation of Indian Industry and the Federation of Indian Chambers of Commerce and Industry earlier this month called for income tax rate cuts to help increase the disposable incomes of individuals and boost household spending.

Economic context and growth challenges

While stability in the tax regime is a virtue that the government prefers, modifying the new tax regime again after last year’s revision, that too in the early years of its third term in office, shows the urgency to stimulate consumption demand.

Despite the proposed tax relief on personal income, the government intends to maintain its fiscal consolidation glide path, the first person quoted above said. In the current fiscal, Centre will keep fiscal deficit within 4.9% of nominal GDP and within 4.5% next year, sending a strong signal of fiscal credibility.

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Household spending, which accounts for more than half of India’s GDP, had rebounded in FY22 after the pandemic-induced contraction in FY21 and had averaged 5.4% in the last two financial years. It is projected to grow 7.2% this fiscal from a year ago, as per the first advance estimate of GDP released by the statistics ministry.

Besides personal income tax relief, the Centre is also likely to keep its capital expenditure at elevated levels as it leads to immediate demand creation in the economy. Experts expect a broad set of measures to add momentum to economic growth.

“Boosting household spending is critical as it is the main driver of the economy. We need measures to boost private consumption expenditure either through government capital expenditure creating more jobs, or by upskilling more people and enabling them to secure jobs. Using technology to improve social outcomes is also expected to remain a priority for the government," said RumkiMajumdar, and economist at Deloitte India.

Also read | How taxes and fees add 7-12% to your property purchase cost

The common man has expectations from the budget in terms of tax relief, said Amit Maheshwari, tax partner at AKM Global, a tax and consulting firm, including increasing the basic exemption limit to 5 lakh and adjusting tax slabs for more disposable income.

“It is good for the economy as well since consumption levels will be stimulated. The new regime must be made more attractive and ideally, the old tax regime should be eliminated, removing the confusion over which one to opt for," said Maheshwari.

Maheshwari said that deductions of certain expenses and investments up to 1.5 lakh from taxable income under section 80C of the Income Tax Act has stayed unchanged for 10 years, and incorporating some grandfathering benefits of old investments under the tax new regime was needed.

The government should consider bringing back the indexation benefit on long-term gains for properties and other assets as many taxpayers would end up paying taxes even for small appreciation which may not be a real appreciation considering inflation, he said.

Centre’s personal income tax receipt has been growing strongly and faster than the government’s revenue from corporate tax. After a 25% annual growth in FY24, the personal income tax receipts of central government is expected to grow more than 13% in the current fiscal to 11.87 trillion. That would be faster than the 9.7% nominal GDP growth estimated for this year.

Also read | India should take cues from Piketty on enlarging its tax mop-up

Although individuals as a category have overtaken businesses in paying taxes on income in FY23 and have maintained that trend, the share of middle-income earners in the personal income tax kitty has fallen over the past five years, thanks to deductions and incentives, even as the contribution of wealthier taxpayers has risen, Mint reported on 23 October last year, analysing tax department’s data.

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