India Reduces Personal Tax Rates in Annual Budget

By Nikunj Ohri, Shivangi Acharya, and Sarita Chaganti Singh
NEW DELHI (Reuters)
India has slashed personal tax rates in its annual budget, aiming to boost domestic demand amid global economic uncertainties and potential tariff barriers.

The world’s most populous nation is anticipated to experience its slowest growth in four years, driven by weak urban demand and private investment, while persistent food inflation has affected disposable incomes.

Key Changes

The government announced that individuals earning up to 1.28 million Indian rupees ($14,800) annually will not pay taxes, increasing the threshold from 700,000 rupees. Tax rates for those earning above this threshold have also been reduced.

Finance Minister Nirmala Sitharaman stated, “The new structure will reduce taxes on the middle class, allowing for increased household consumption, savings, and investment.”

Impact on Treasury Revenues
This tax reduction will result in an annual 1 trillion Indian rupee ($11.6 billion) loss to Treasury revenues. Various measures to support the poor, youth, farmers, and women were also included in the 2025-26 budget.

Rising living costs have impacted Prime Minister Narendra Modi’s popularity, with surveys indicating that many Indians feel less optimistic about their quality of life.

Economic Outlook

Per capita income is around $2,700 for India’s 1.4 billion people, with about one-third classified as middle class. Sakshi Gupta, an economist at HDFC Bank, remarked that the tax cut is likely to increase consumer demand and savings in this demographic.

Consumer stocks such as Maruti Suzuki and Godrej Consumer Products saw rallies between 4% and 8% following the announcement.

Government’s Fiscal Plans

To offset revenue losses, the government has planned a modest increase in capital spending to 11.21 trillion rupees for 2025-26, up from 10.18 trillion in the current year. However, this was met with disappointment from investors in the infrastructure sector, with related stocks experiencing declines of 1% to 6%.

The government aims for a fiscal deficit of 4.4% of GDP, reduced from a revised 4.8% of GDP currently, and plans to borrow 14.82 trillion Indian rupees via bond markets.

Adjustments to Address Inflation and Boost Manufacturing

The government has not anticipated the effects of potential tariffs from the U.S. but is focused on lowering input costs in industries like electronics and renewables.

To enhance agricultural productivity, India will initiate a national mission supporting high-yielding crops, especially pulses and cotton. The limit for subsidized credit for farmers has been raised to 500,000 Indian rupees ($5,778).

Efforts to increase manufacturing and exports were also announced, although details remain sparse. India has historically struggled to increase the manufacturing sector’s share of GDP, which hovers around 17%, far off its target of 25%.

Additionally, the foreign direct investment limit in the insurance sector has been raised to 100% from 74%.

($1 = 86.5360 Indian rupees)