Centre Considers Income Tax Cuts for Middle Class in February's Budget

The Centre is reportedly considering reducing income tax for individuals earning up to Rs 15 lakh annually in the upcoming February budget. This move aims to provide relief to the middle class and stimulate consumption amid a slowing economy, according to two government sources.

The proposed tax cuts could benefit millions of taxpayers, particularly those in urban areas burdened by high living costs. Under the current tax system, individuals with annual incomes between Rs 3 lakh and Rs 15 lakh are taxed at rates ranging from 5% to 20%, while higher incomes are taxed at 30%. However, those opting for the 2020 tax system, which removes exemptions such as housing rental deductions, could see benefits from a lower tax rate.

India offers taxpayers a choice between two tax systems: the legacy plan, which allows exemptions on housing rentals and insurance, and the 2020 plan, which provides slightly lower tax rates but eliminates most exemptions.

Sources, who requested anonymity due to their lack of authorization to speak publicly, stated that the size of the tax cuts has not yet been decided and will be finalized closer to the February 1 budget announcement. They also refrained from commenting on the revenue loss from any proposed tax cuts, although one source suggested that reducing tax rates could encourage more people to choose the simpler, newer tax system.

India primarily collects income tax from individuals earning at least Rs 1 crore, who are taxed at the highest rate of 30%. The potential tax cuts for the middle class come as the country faces its slowest economic growth in seven quarters, between July and September. High food inflation has also dampened demand for goods, from everyday items like soaps and shampoos to bigger purchases such as cars and two-wheelers.

The government has been under political pressure from the middle class, with concerns over high taxes and wages not keeping pace with rising inflation.