The expectations of income tax payers have risen ahead of the Union Budget 2025, which will be presented by Finance Minister Nirmala Sitharaman on February 1, 2025. According to news agency Reuters, citing sources on December 26, the government is likely to reduce income tax in the upcoming budget.
Reports suggest that tax cuts may be applicable on annual income up to ₹15 lakh, although the exact tax slab reductions have not been decided yet.
Attempt to Boost Consumption
Tax experts believe the government is looking to reduce the tax burden on individuals in a bid to boost consumption. This push to increase consumption comes as the GDP growth rate fell to 5.4% in the second quarter of the current financial year.
Rising inflation, particularly food inflation, has been a concern for the public, with people increasingly cutting back on spending, even on essential items. This trend is seen as negative for economic growth.
Impact of Inflation on Spending
Inflation reached 6.21% in October, largely due to rising food prices. Although inflation decreased to 5.48% in November, it remains significantly above the Reserve Bank of India’s (RBI) target of 4%.
While prices of fruits and vegetables have softened, the cost of onions, peas, and tomatoes remains higher than it was a year ago. Experts do not expect significant relief in food inflation in the near future.
RBI Increases Inflation Forecast
The RBI has revised its retail inflation forecast upwards for the third quarter. It had initially expected inflation to be 4.8% for the December quarter but has now increased it to 5.7%. The inflation forecast for the fourth quarter (ending in March) has also been raised from 4.2% to 4.5%.
Government’s Focus on December Inflation Data
Economists suggest that the government is closely monitoring the inflation data for December, which will be released on January 12. This data will help the government assess the overall inflation trend and inform its decision regarding income tax cuts. The government will need to determine which income tax slabs should be reduced.
Possible Options for Tax Reductions
Tax experts believe that in light of rising food prices, the government may offer full income tax exemption for individuals earning up to ₹5 lakh annually. This exemption could be provided under both the old and new tax regimes.
For incomes between ₹7 lakh and ₹10 lakh, a modest tax reduction could be expected, while a more significant tax cut may be offered to individuals with annual incomes between ₹10 lakh and ₹15 lakh.
