The income tax cut announced in the Union Budget 2025-26 can boost consumption by up to 10 per cent which could lift India’s GDP growth by 8 per cent, according to Krishnamurthy V Subramanian, an Executive Director at the International Monetary Fund (IMF).
In the Budget 2025-26,
Union Finance Minister Nirmala Sitharaman revamped the income tax regime and proposed that income up to Rs 12 lakh a year be exempted from income tax. As of now, income up to Rs 7.5 lakh a year is tax-free.
Sitharaman proposed the restructuring of income tax slabs so that the maximum tax of 30 per cent would be imposed on annual income of Rs 24 lakh or more. As of now, 30 per cent tax is applicable to income of or above Rs 15 lakh.
In a post on X, IMF Executive Director Subramanian said that around Rs 1 lakh crore of tax revenue would be foregone as a result of tax cut and that would result in a direct rise in disposable income of the middle class.
Subramanian said that data has shown that when the middle class saves about 20 per cent, 80 per cent of those savings in disposable income go into consumption.
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On the basis of economic data of 2024-25, Subramanian spelled out his calculation in the post and reached the conclusion that consumption could increase by up to 10 per cent that could in turn take the GDP growth to 8 per cent.
The calculation comes at a time when
India’s GDP growth has slowed to a four-year low in 2024 to 6.4 per cent. The Economic Survey 2024-25, released on Friday, said that the economy would grow in the range of 6.3-6.8 per cent in 2025-26.
Critics of Subramanian’s analysis have said that the GDP is unlikely to rise as a result of tax cut as tax revenue foregone would mean result in capital expenditure. However, Sitharaman at a post-budget press conference said that
tax cut would not result in a decline in capital expenditure.
“There is no reduction in the public spending on capital expenditure. We continue to place emphasis on the multiplier effect that capital expenditure done by government has shown has sustained us. We continue on that, and with all this, our fiscal prudence has been maintained,” said Sitharaman.
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