Budget 2025: Rewarding Middle-Class Through Tax Incentives

Sources said that the issue of weakening consumption due to a string of challenges that the country’s middle class is currently facing has come to the notice of the Finance Ministry and other authorities, especially as the government’s first advance estimate pegged India’s GDP growth at 6.4 per cent for the current financial year — the slowest in four years.

Inflated prices, higher borrowing costs and stagnating income levels have dealt a severe blow to India’s middle class, impacting consumption. This is reflected in the private final consumption expenditure (PFCE) data as well, though for the full year it is expected to clock a growth of 7.3 per cent, against 4.0 per cent in 2023-24, as per official estimates.

However, this does not present the true picture of things. In the second quarter of this financial year, PFCE growth slowed down to 6.0 per cent. It is one of the key reasons that impacted overall economic growth. In the first quarter, PFCE growth was 7.4 per cent.

“Though a decision on this is yet to be taken, it is almost certain that the Union Budget this year will come up with some tax relief for the salaried middle class, either in the form of increased deductions, or exemptions,” a person familiar with the Budget exercise told The Secretariat.

“The key is to boost consumption. We expect that to revive by the first quarter of the next financial year,” he added.

While in the last few years, the Narendra Modi government has increased deductions and exemptions for taxpayers, especially belonging to the lower income groups, inflation and cost of borrowings have undone the benefits.

Consumption-Led Growth Is Key

With the rising uncertainty in the geoeconomic space, India will have to rely on a lot more consumption-led growth, especially by harnessing its growing young population.

“This consumption-driven growth model distinguishes India from many export-dependent economies, particularly in Asia. While it presents challenges, such as for managing inflation and trade deficits, it positions India favourably in the current global environment, by providing a buffer against external economic shocks, and reducing vulnerability to international trade tensions and supply chain disruptions,” the European Commission said.

Typically, with about 60 per cent private consumption accounting for India’s GDP, reviving spendings is the key to growth. Besides the government, the Reserve Bank of India (RBI), which will hold its next monetary policy committee (MPC) meeting in February under new Governor Sanjay Malhotra, may also reduce key interest rates amid falling demand for bank credit. 

Government’s Concerns

Home sales in 2024 dropped 4.0 per cent to 4,59,650 units across seven major cities, compared to the previous year. Similarly, car sales have also slowed. The growth in car sales was a mere 5.0 per cent in 2024 — the slowest rate of increase in four years. Both figures have highlighted the challenges faced by the urban middle class.

While the slowdown in consumption is also due to high interest rates, the RBI has left the repo rate — the key policy rate at which banks borrow from the central bank — unchanged at 6.5 per cent since 2023, despite slowdown in growth. Sitharaman is expected to make the necessary adjustments in the Budget.

“The urban economy is grappling with the dual challenges of high inflation and slowing credit growth,” D K Joshi, Chief Economist, Crisil, said in a statement after the first advance GDP estimate was released earlier this month. “The recent data indicates consumer confidence has moderated in urban areas, and growth in retail credit, which has a larger footprint in the urban economy, has slowed,” he said.

According to an article published by the East Asia Forum, there’s a risk of serious social crisis in the middle class if growth falters and fails to create enough quality jobs. “Meeting the aspirations of India’s ‘new’ middle class, and ensuring that they are not left behind, is a priority for the government in managing the country’s new social and economic fabric,” it said.

The direct tax collection this financial year (up to January 12), as per Central Board of Direct Taxes (CBDT), increased by 16 per cent, touching about Rs 16.90 lakh crore, of which personal income tax amounted to over Rs 8.74 lakh crore. In the previous financial year, PIT stood at Rs 7.2 lakh crore.

The total number of income tax returns (ITR) filed for assessment year (AY) 2024-25 till July 31, 2024, was more than Rs 7.28 crore — 7.5 per cent higher than the total ITRs for AY 2023-24 (Rs 6.77 crore). While the government has managed to increase the number of ITRs, it continues to fall woefully short when compared to other nations.

What India Needs 

What India needs is to increase the number of tax filers as well as taxpayers. For a country with more than 60 per cent people in the working age group, it is imperative to increase the number of taxpayers, while easing the tax burden, failing which, it could have to face the rising discontent among existing taxpayers, which is now readily reflected on social media.

“If salaries are not growing with inflation — people paying direct taxes should be given a tax break,” Akshat Shrivastava, financial influencer and founder, Wisdom Hatch, wrote on LinkedIn.

"Widening the tax base is literally the next critical thing that needs to be done", he added.