India cuts taxes to boost middle-class spending

Move to spur growth amid falling household savings, weak demand

- Debarshi Dasgupta

NEW DELHI - The Indian government has slashed income tax rates for individual taxpayers in its new budget in an effort to boost household savings and promote consumption aimed at revitalising the world's fifth-largest economy.

On Feb 1, Minister of Finance Nirmala Sitharaman, while presenting her budget for the 2026 fiscal year in the Indian Parliament, said those earning up to 1.2 million rupees (S$18,800) annually will effectively no longer pay income tax. This threshold was lower before at 700,000 rupees.

Acknowledging that the Indian middle class "provides strength for India's growth", Ms Sitharaman also reduced income tax rates for those earning more than 1.2 million rupees.

"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," she said.

A tax relief measure was widely expected, with household savings plummeting to a five-year low in FY2023 and poor consumption demand becoming a drag on economic growth.

Parliamentarians from the Bharatiya Janata Party (BJP) greeted the announcement with cheers and thumped their desks loudly, while Indian social media erupted in celebration.

This budget was the first from the current Narendra Modi-led government after he was sworn in as prime minister for a third term in June 2024 with a reduced mandate that saw his party lose its majority in Parliament, as a lack of jobs, high inflation and falling income levels led voters to rein in support.

Gross domestic product (GDP) growth in India is expected to slow to 6.4 per cent in FY2025, the slowest in four years.

The government's Economic Survey tabled on Jan 31 projected this figure would range from 6.3 per cent to 6.8 per cent in FY2026, suggesting continued sluggish economic growth amid frail urban demand as well as weak manufacturing and private investment.