India Unveils Income Tax Cuts to Boost Economy

AFP | India
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India’s finance minister, Nirmala Sitharaman, unveiled broad income tax cuts on February 1, 2025, as Prime Minister Narendra Modi’s government aims to bolster consumption and strengthen the economy. With the world's most populous country expected to grow at its slowest pace since the COVID-19 pandemic, the government is seeking ways to encourage spending and investment.

The new tax structure will significantly benefit the middle class, allowing them to keep more of their earnings. "The new structure will substantially reduce the taxes of the middle class and leave more money in their hands, boosting household consumption, savings, and investment," Sitharaman said while unveiling the annual budget.

Under the revised system, individuals earning an annual income of up to 1.2 million rupees ($13,800) will be effectively exempt from income tax. This marks a substantial increase from the previous threshold of 700,000 rupees, nearly doubling the tax-free limit. The finance minister also emphasized that tax slabs and rates would be adjusted across the board to benefit all taxpayers, providing relief to millions across the country.

The government has also introduced changes aimed at stimulating demand in the economy. For example, the decision to remove income tax for those earning up to Rs 12 lakh will increase middle-class spending power, potentially driving growth in key sectors like real estate, retail, and automobiles. This move is expected to give a boost to consumer spending by enhancing disposable income.

Adeeb Ahamed, Managing Director of LuLu Financial Holdings, commented on the Union Budget, noting that it is designed to boost short-term consumption. He highlighted that the removal of income tax on income up to Rs12 lakh would stimulate demand, especially in sectors reliant on higher disposable incomes.

The budget also proposes raising foreign direct investment (FDI) in the insurance sector from 74% to 100%. This move is expected to attract foreign capital, enhance competition, and drive innovation in the industry. Additionally, the government has raised the TCS exemption limit for remittances under the RBI's Liberalised Remittance Scheme from Rs7 lakh to Rs10 lakh, offering relief to individuals sending money abroad for travel and investment purposes. The government also announced the removal of TCS on education remittances financed by education loans, which will ease the financial burden on students studying abroad.

Despite these positive changes, some experts feel the government’s efforts toward financial sector reforms lack substance. While the revamped central KYC registry is a step in the right direction, more concrete steps are needed to bolster financial sector resilience and growth.

Tourism, a major potential driver of job creation, also deserves more attention, according to analysts. While the inclusion of hotels in the top 50 tourism destinations list is a positive move, the sector as a whole requires stronger policy support to unlock its full potential.

Overall, this budget is seen as populist, offering welcome relief to the middle class and small and medium-sized enterprises (MSMEs). However, experts believe there is still room for stronger action in key areas. Follow-up measures in the coming months could help address these gaps and promote long-term growth.

The government is expected to forego revenue worth 1 trillion rupees ($11.5 billion) due to these tax cuts. India is also projected to post a deficit of 4.8% of GDP this fiscal year, slightly lower than the 4.9% deficit projected last year. This reduction is likely driven by lower capital expenditure.

The benchmark Nifty index, however, gave up initial gains made during Sitharaman's speech, trading 0.19% lower during a special budget trading session of the Mumbai bourse.