India Provides Middle-Class Tax Relief to Boost Growth, Targets Smaller Budget Deficit

India plans to lower personal income tax rates to enhance middle-class spending power, Finance Minister Nirmala Sitharaman announced on Saturday while unveiling the annual budget. The budget also aims to stimulate private investment to strengthen economic growth.

The world’s fifth-largest economy is projected to experience its slowest growth in four years next year, affected by weak urban demand and sluggish private investment. Additionally, persistently high food inflation has eroded disposable incomes.

Sitharaman said the budget for 2025-26 includes measures to support the poor, youth, farmers, and women, along with “transformative reforms in taxation.” Under the new provisions, individuals earning up to 1.28 million rupees ($14,800) annually will be exempt from taxes, an increase from the previous threshold of 700,000 rupees. 

Tax rates have also been reduced for those earning above this limit, with the measures expected to cost approximately 1 trillion rupees in tax revenues.

Despite the tax relief, the government is continuing efforts to improve its finances, setting a fiscal deficit target of 4.4% of GDP for 2025-26, down from a revised 4.8% in the current year. To finance this deficit, the government plans to borrow 14.82 trillion rupees ($171 billion) through bond markets.

To offset the revenue loss, the government has proposed a moderate increase in capital spending, which is set to rise to 11.21 trillion rupees in 2025-26 from a revised 10.18 trillion rupees in the current year.

Faridah Abdulkadiri

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