Union Budget 2025-26: Personal Income Tax Reform as a fuel for Vikshit Bharat

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The much-awaited Union Budget 2025-26 has been presented on 1st February 2025. The budget has proposed development measures across various broad areas. Development has been termed a journey. Agriculture, micro, small & medium enterprises (MSME), investment and exports have been characterised as four powerful engines in this journey of development. Moreover, reforms, inclusivity, and Vikshit Bharat have been termed as fuel, guiding spirit, and destination, respectively. The reforms, which are being treated as fuel, has been initiated across six domains, i.e., taxation, power sector, urban development, mining, financial sector and regulatory.

This article focuses on reforms initiated in the personal income tax reforms in the taxation domain. Personal income tax has gained importance for being a vital sources of government revenue and a tool for achieving several economic objectives. In the budget 2025-26, special focus has been given on the middle-class in the personal income tax reforms. Through this reform the tax burden has been reduced. No tax is payable up to income of ₹ 12 lakhs per annum (₹12.75 lakh per annum for salaried taxpayers due to standard deduction of ₹ 75,000) in the new tax regime. This may become a significant boost for household consumption, savings and investment. Furthermore, there have been changes in income tax slabs and rates. These changes in slabs and rates of income tax will keep more money in the hands of all taxpayers, increase their purchasing power and may lead to economic growth of India. Taxpayer with an annual income up to ₹12 lakhs will have zero tax liability. In 2024-25, with the same annual income the tax liability was ₹ 80,000 as per the new tax regime. Hence there is a tax benefit is ₹ 80,000 in 2025-26 for annual income up to ₹12 lakhs. Similarly, another taxpayer with an annual income of ₹ 24 lakhs has a tax benefit of ₹ 1,10,000 as the tax liability is ₹ 3,00,000 in 2025-26 in comparison with ₹ 4,10,000 in 2024-25.

The tax rebate given to taxpayers may give a significant boost to household consumption, savings and investment. As the personal income tax will leave more money in the hands of the middle-class, the purchasing power this rising middleclass will improve. The improved purchasing power may lead to increased household consumptions and upliftment of household sentiments. Household consumption is considered as major driver of economic growth. With an increase in household consumption the demand for goods and services rises which in turn encourages business to produce more and more and employ more and more workforce. Consequently, this gives a boost to employment in the economy. The increase in the employment further stimulates demand for goods and services and thus the economic activities increase and leads to overall economic growth.

Savings are another key factor for economic growth. Savings do play an important role in supporting long term growth. As savings provides the much-needed capital for investment, these are significant factor for the growth of the economy. Households channelise the savings to businesses through financial institutions. Businesses use this savings for the expansion of production capacity, new projects, technological upgradation etc. This helps in productivity improvements and overall economic growth.

Another important driver of economic growth is investment. This creates the foundation for the improvement in the productivity capacity of the economy which further leads to job creation and improved standard of living. Investment in physical as well as human capital enhances the productivity which leads to production of more goods and services to meet the household consumption and to achieve the accelerated growth of the economy.

In conclusion, it can be said that India, having a greater possibility, growth potential and aiming for global competitiveness as well as global positioning is bound to move towards the destination (Vikshit Bharat) through the fuel (Personal Income Tax Reforms). May the second quarter of the 21st century witness India as an economic superpower!

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