A high-class budget for middle-class India

Budget 2025 was riding a giant wave of middle-class angst that I captured in two columns earlier in the year. You can read them at tinyurl.com/bddzk62n and tinyurl.com/mtpxyes2. A dedicated voter base of Prime Minister (PM) Narendra Modi, middle-class India felt cheated with no major tax breaks over the past few years and an increasing sense of unease at the generous cash transfers to the poor. Combined with the continued experience of poor government services and endemic corruption, the mood on the ground was clearly ugly.

The government sensed the mood. Said the finance minister in her speech: “Our Government is committed to keeping an ear to the ground and a finger on the pulse, and responding while balancing our nation-building efforts”. And respond she did: “The middle class provides strength for India’s growth. This government under the leadership of Prime Minister Modi has always believed in the admirable energy and ability of the middle class in nation-building”.

This set the stage for some big bang tax cuts. Making the old tax regime almost defunct, the new tax regime now has tax slabs with two big changes that are making this an A-ha moment. First, incomes up to ₹12 lakh have gone zero tax. This is big as it makes somebody earning ₹1 lakh a month (and no more) liable to pay no income tax. Along with the standard deduction of ₹75,000, this threshold is actually ₹12.75 lakh. This benefits more than 2.4 million who were in the income band of ₹4 lakh to ₹12.75 lakh.

Second, the highest slab rate now begins at an income of ₹24 lakh a year, up from the earlier ₹15 lakh. This will have a significant impact on the money left on the table for a middle-class person who is defined as having a household income of between ₹5 lakh and ₹30 lakh a year. A person earning ₹16 lakh, for example, gets an extra ₹50,000 a year in her wallet and a person earning ₹24 lakh will have an extra ₹1.1 lakh to spend or save.

Other than the big bang tax cut, there were four other proposals that will have an impact on middle-class India. One, the tax deduction at source (TDS) threshold for senior citizens is being doubled from the present ₹50,000. Two, the annual limit of ₹2.40 lakh for TDS on rent is being increased to ₹6 lakh. Three, the dreaded tax collected at source on foreign spending now stands at ₹10 lakh per person, up from the current ₹7 lakh. Four, an unused second property (in the same city) now will not attract an imputed rent provision.

Three other proposals are noteworthy. One, the push for a centralised KYC system should hopefully put an end to the death-by-KYC-update game that right now is the bane of anybody with a bank account, an insurance policy or a mutual fund. Two, gig workers of online platforms will now get health care benefits under the Jan Arogya Scheme. They will need to register on the e-Shram portal, giving the government a handle on another set of future tax-payer information. Three, customs duties have been lifted for life-saving drugs for cancer patients and those afflicted with rare and chronic diseases.

Other proposals such as the hike in foreign investment in insurance to 100% finally bring an end to the socialist mindset that prevented this from happening when the insurance sector opened up in 2000. It has taken us a quarter of a century to discard this ideology from our markets. The proposal to set up a forum for regulatory coordination and development of pension products is good news. Pension-seeking Indians today navigate multiple regulators with wildly different rules, rather than choose products based on merit. I can only hope that the forum works on first principles, keeping the investor rather than regulatory fiefdoms, in mind.

Overall, I think this budget is a leap of faith by the government. It is hoped that lower taxes and greater scrutiny will improve tax compliance. It must be with that in mind that instead of reducing the budget expectations of personal direct tax revenue is ₹2 lakh crore higher than the current year, after taking into account the over ₹1 lakh crore revenue loss.

The government is playing the long game here because the results of these tax cuts will take at least 12 to 18 months to show up in the economy. The hope is that middle-class India saves some and spends some giving a boost to both the saving ratio and consumption — both of which are good for the economy.

Monika Halan is the bestselling author of the Let’s Talk series of books on money. The views expressed are personal