In the financial year 2024-25, 10.4 crore citizens of the country paid income tax. This was a significant increase compared to the previous financial year. Accordingly, the number of taxpayers was expected to grow even further in the financial year 2025-26. However, in this year’s budget, the central government granted income tax exemptions to individuals earning up to Rs 12 lakh annually. For salaried employees, the tax exemption limit has been set at Rs 12.75 lakh, considering the Rs 75,000 benefit from the ‘standard deduction.’
Due to this tax exemption on earnings up to Rs 12 lakh, the number of direct taxpayers will significantly decrease. It is difficult to determine the exact number at this point. However, as the number of tax payers declines, revenue collection will also decrease. The exact amount of revenue loss has not been specified in the budget, as Finance Minister Nirmala Sitharaman did not disclose how much the government would lose due to these exemptions. However, according to economic analysts, the government may lose Rs 1.60 lakh crore in direct tax revenue in the upcoming financial year due to these tax exemptions. Notably, in the previous financial year, the government collected Rs 15.82 lakh crore in income tax revenue, which was 16.5% higher than the preceding year.
But why has the government chosen to forego such a massive amount of revenue through tax exemptions? There are several economic reasons behind this decision. In an interview, Finance Minister Nirmala Sitharaman stated that Prime Minister Narendra Modi had instructed her to provide relief to the middle class. She claimed that there was no alternative to reducing income tax to support the middle class. Since the prices of most goods are now determined by GST, except for alcohol and petrol-diesel, there were no direct measures in the central budget to provide relief to citizens apart from tax exemptions.
However, the Finance Minister’s claim is only partially true. The main objective is to strengthen the country’s economic stability through middle-class savings and expenditures. With tax exemptions, the money that remains in taxpayers’ hands will be spent on purchasing various goods and services. This will increase demand for products and services, ultimately boosting the economy. In a country like India, domestic demand drives sustainable development. Additionally, the money saved will be deposited in banks or invested, further energizing the economy. Tax exemptions will relieve the middle class from financial burdens and increase disposable income.
Furthermore, reducing income tax is also a strategic political move. The Delhi elections are just around the corner, followed by the Bihar assembly elections. These tax exemptions will likely attract voters toward the BJP. On the other hand, it will encourage a larger number of people to file income tax returns (ITR). Even if individuals do not have to pay tax, they will still file their returns, leading to better tax compliance. More taxpayers filing returns will also bring India’s tax system closer to international standards.
Considering all these factors, the Finance Minister has chosen tax exemptions as a key policy measure in this budget.