Taxpayer Wishlist: How Budget 2025 Could Ease The Tax Burden On The Middle Class?

The standard deduction was raised from Rs 50,000 to Rs 75,000 in the Union Budget 2024, and tax slabs for income up to Rs 10 lakhs were relaxed. It is anticipated that the Union Budget 2025 may include a possible tax rate cut for individuals earning up to Rs 15 lakhs, continuing this trend. Reduced tax rates undoubtedly increase the danger of conserving more money versus spending, which might stall the goals for economic development. They will spend more to satisfy their need for high-end items as the tax rate reductions will increase their disposable income. Consequently, expenditure in both rural and urban areas will increase, contributing to the decline in GDP growth in 2025. Based on an interview with Mr. Subhash Chand Aggarwal, Chairman and Managing Director of SMC Global Securities, here is the answer to the most searched question: will Budget 2025 bring relief through higher income tax exemptions?

Q1. What are the expectations around income tax for the middle class in the upcoming budget?

In the Union Budget 2024, the relaxation of tax slabs for income of up to Rs 10 lakhs and an increase in the standard deduction from Rs 50,000 to Rs 75,000 were announced. Continuing with this trend, it is expected there might be some reduction in tax rates for individuals earning up to Rs 15 lakhs in the Union Budget 2025.

Inflation has really hurt the consumer's purchasing power, thereby leading to a fall in spending. The growth in wages is not in line with the inflation and hence we see a reduced demand from the automobile sector to the said to be stable FMCG sector. In the July-September 2024 quarter, FMCG's sector growth in value was 5.7%, way lower than the 9% growth in the corresponding period of 2023. Reducing the tax slabs will help in increasing disposable income leading to a rise in demand and thereby fostering production and economic growth.

Q2. There are reports that the government is considering an income tax cut particularly for persons earning up to Rs 15 lakh per annum to boost consumption. Do you think it will fix the slowdown that we are seeing and what more the government needs to do to boost consumption?

Yes, definitely. With more money in hand, the demand from the consumers will revive and the current slowdown will take a road to recovery. In the rising inflation scenario and falling GDP growth rate, cutting down the repo rate (or interest rate) to boost economic growth can be a tricky situation. So, tax rate cuts can definitely help in rejuvenating the withered Indian economy with higher spending and more money circulation.

Apart from tax cuts, the government can also focus on boosting the infrastructure sector to increase employment levels, leading to a rise in income and consumption. Push to the agricultural sector can also be on the Union Budget 2025 agenda as it contributes 18.2% to India's GDP and is the source of bread and butter for 42.3% of the population.

Q3. There is another school of thought that believes that even after-tax cuts, people with more money in hand might choose to save rather than spend. What in this case should be done to increase spending?

Tax rate cuts certainly impose the risk of higher saving rather than spending which can stagnate the economic growth targets. However, India is not subject to this risk as consumers are facing a huge cash crunch due to higher inflation. Household savings dropped to Rs 14.16 lakh crores in 2022-23 from the record level of Rs 23.29 lakh crores in 2020-21. In the same period, loans to households have grown by 4 times to Rs 3.33 lakh crores in 2022-23.

To maintain the set standard of living, many people are pulling out funds from their savings and taking loans to channel them for consumption and expenses. With the tax rate cuts, their disposable income will rise and hence they will spend more to meet their demand for premium goods. Therefore, both the rural and urban spending will rise which will aid the falling GDP growth in 2025.

Q4. Currently, there are two income tax regimes in place. Do you think the government should merge the two? Which one is better, two separate tax regimes or a merged one?

The old tax regime charges higher tax rates and provides more exemption and deduction benefits with the new tax regime having vice-versa features. Merging the two tax regimes can help in simplifying the tax structure. However, it can impact the taxpayers for those who don't invest and sources to claim a deduction of Rs 1.5 lakhs in the old tax regime and hence they will be more benefited in the new regime with lower tax rates.

Two separate tax regimes are better for taxpayers as they can decide which one to choose as per their income levels and deduction claims. There is certainly a need to simplify the tax structure and set up an easier process to make a shift in the two tax regimes. With the two tax structures, taxpayers can make decisions on their long-term investment goals and spending activities in a more flexible manner.