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The government is considering reducing taxes for individuals earning up to Rs 10.5 lakh annually, potentially providing significant relief to middle-class taxpayers. This move, expected to be announced in the upcoming Budget 2025 on February 1, aims to boost consumption and address concerns over rising living costs in a slowing economy. If implemented, the measure could benefit millions, particularly urban taxpayers dealing with high expenses. The current regime introduced in 2020 taxes incomes between Rs 3 lakh and Rs 10.5 lakh at rates between 5% and 20%, while incomes exceeding Rs 10.5 lakh face a 30% tax rate. Taxpayers can choose between the traditional structure with exemptions or the newer regime with lower tax rates but fewer exemptions. The proposed cut is expected to encourage more individuals to adopt the simplified 2020 regime, although the government has not finalized the size of any reductions.

The proposed tax rate reduction could compensate for revenue losses by encouraging more people to use the simplified tax system. This comes as India faces economic difficulties, with GDP growth dropping to its lowest point in seven quarters between July and September 2024. High food prices are reducing household spending power, especially in cities, and decreasing demand for products like vehicles, household goods, and personal care items. The political impact of high taxes on the middle class, combined with wages not keeping up with inflation, has increased pressure on the government.