Tax Cuts to Boost Discretionary Spending, Especially Among Salaried Individuals: Report

By: Admin
February 05, 2025
Categories: Tax News
4 Min Read

Government Balances Fiscal Consolidation with Consumption Growth

The Union Budget 2025-26 prioritizes fiscal consolidation while introducing tax cuts to boost discretionary spending, particularly among salaried individuals. A BNP Paribas report highlights the potential economic impact of these measures, noting their alignment with the government’s broader fiscal and economic goals.

Focus on Fiscal Consolidation and Consumption Revival

The Budget continues its fiscal consolidation strategy, aiming to reduce the fiscal deficit to 4.4% of GDP by FY26, down from 4.8% projected for FY25. While maintaining long-term fiscal sustainability, the government has introduced short-term tax incentives to encourage spending.

Key Measures Introduced:

• Raised income thresholds and relaxed tax slabs under the new tax regime (NTR).
• Policies encouraging more taxpayers to transition to the NTR, shifting away from traditional tax exemptions.

Higher Disposable Income to Drive Spending

The new tax slabs will increase disposable income by 2-7%, depending on income levels. This translates to an additional ₹2,000 to ₹10,000 per month for salaried individuals.

The government expects this extra income to fuel discretionary spending, benefitting industries such as:

• Consumer durables
• Automobiles
• Asset management
• Healthcare
• Travel
• Jewelry

These sectors align with the “Affluent India” growth theme, reflecting rising consumption among middle- and upper-income groups.

Impact on Salaried Taxpayers

Salaried individuals form a large portion of India’s tax base. Among taxpayers earning above ₹10 lakh annually in FY23, nearly 9.7 million belonged to the salaried class. The tax cuts specifically target this segment, aiming to increase consumption and improve retail asset quality, especially in unsecured lending.

Budget Assumptions and Economic Outlook

For FY26, the Budget assumes:

• GDP growth of 10.1%
• Revenue receipt growth of 10.8%
• Expenditure growth of 7.4%

Although subsidies will likely remain flat, the biggest increase in spending is allocated to interest payments. While these projections seem reasonable, BNP Paribas has flagged concerns about the government’s income tax revenue targets, calling them “aggressive.”

Conclusion

The Union Budget’s tax reforms are expected to boost discretionary spending, especially among salaried individuals. With higher disposable incomes, taxpayers may increase small-ticket purchases, benefitting multiple industries. These measures, combined with the fiscal consolidation roadmap, showcase a balanced approach to stimulating short-term growth while ensuring long-term stability.

Stay updated on tax and economic policies to understand how budget changes may affect you.