India’s budget for the fiscal year 2025-26 has taken the spotlight with significant tax reforms, particularly aimed at providing relief to the salaried middle class. Presented on February 1, 2025, by Finance Minister Nirmala Sitharaman, the budget proposes drastic income tax cuts, hoping to stimulate growth and address rising unemployment.
Sitharaman, during her budget address, stated, "The focus of the budget is taking everyone together on an inclusive path.” This reflects the government’s intent to boost economic activity among middle-class taxpayers by raising the income tax exemption limit from ₹8.07 lakh to ₹12 lakh. This means no income tax will be payable by individuals earning up to this threshold, thereby leaving more disposable income for consumption.
The new income tax structure outlines several tiers: earnings up to ₹4 lakh remain tax-free, earnings between ₹4 lakh and ₹8 lakh incur 5% tax, incomes between ₹8 lakh and ₹12 lakh face 10% tax, followed by higher slabs of 20% up to ₹20 lakh, 25% up to ₹24 lakh, and 30% for incomes beyond ₹24 lakh. Sitharaman emphasized, "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.”
The government has long faced pressure to address discontent among the middle class and create job opportunities as youth unemployment hovers around 7.5%, according to the Center for Monitoring the Indian Economy. The revised tax provisions aim not only to alleviate financial burdens but also to stimulate private investment, which is seen as pivotal for economic growth.
Besides tax reductions, significant proposals were made to transform the tax structure. Sitharaman announced the introduction of a new Income Tax Bill intended to simplify the current Income Tax Act of 1961, which is laden with complex exemptions and categorizations. This new legislation will reportedly reduce the volume of existing tax laws by nearly 60%, making them easier to understand and navigate.
"The new income-tax bill will carry forward the same spirit of ‘Nyaya’,” Sitharaman declared, intending it to be more transparent and user-friendly. It aims to address concerns surrounding tax litigation and create clarity for taxpayers, with Sitharaman urging tax department officials to “trust first and verify later.” This indicates a shift toward fostering compliance rather than punitive scrutiny.
Tax experts are already anticipating changes, particularly concerning the categorization of taxpayer resident statuses. Current laws delineate three categories: resident individuals, resident but not ordinarily resident, and non-residents. Future adjustments propose rolling this down to two categories, aiming to simplify compliance.
There also exists considerable debate about the broader structure of the direct tax code. Previous drafts of changes proposed by the Direct Tax Code, 2009 included eliminating many of the exemptions and deductions embedded within the existing legislation. Harsh Bhuta, Partner at Bhuta Shah & Co, remarked, “A significant shift is anticipated,” indicating the potential simplifications can alleviate taxpayer burdens.
Alongside the income tax reforms, the Indian government has also declared initiatives targeting the agricultural sector. A nationwide program will push for the cultivation of high-yield crops, particularly pulses and cotton, to increase productivity for approximately 17 million farmers. Financing for this initiative will be boosted by increasing the credit ceiling for farmers, from approximately $3,460 to $5,767, which aims at empowering and enhancing the livelihoods of those working in agriculture.
Another significant move is the formal registration of gig workers, aiming to improve their access to health care and welfare programs. This initiative underlines India's transitional labor market as it is forecasted the gig economy could employ more than 23 million individuals by 2030.
To promote entrepreneurship and innovation, Sitharaman announced funding for startups and collaboration with private sectors to stimulate manufacturing and exports. India’s manufacturing sector, currently holding about 17% of GDP, is striving to reach its goal of contributing 25% to economic output.
Investments will also be made to develop tourism-focused infrastructure across various states, complementing plans to expand air connectivity by establishing about 120 new destinations over the next decade. Such initiatives are seen as integral not only for growth but also for job creation.
Concluding her budget speech, Sitharaman introduced the Nuclear Energy Mission, aiming to advance India’s clean energy transition by developing 100 GW of nuclear power by 2047. These steps collectively signal the government's intention to bolster both economic vitality and environmental sustainability.
India’s 2025 budget clearly addresses pressing economic challenges, offering substantial tax relief to the middle class and setting the stage for long-term economic growth and stability. With the outlined reforms, the government is not only responding to immediate fiscal demands but also laying the groundwork for stronger economic resilience amid pressing socio-economic challenges.