Neeraj Kumar and Dr Maya. K
India is making significant progress in various fields, which is evident from its increasing number of middle-class households, currently representing 31% of the population. This proportion is projected to reach 38% by 2031 and 60% by 2047. Over the next decade, the Indian economy expects 110 million households to join the middle-income category. The Budget 2024, presented by Finance Minister Nirmala Sitharaman on 23rd July, further supports these projections. The finance minister has proposed robust initiatives focusing on the “four major castes”: farmers, the poor, youth, and women. These initiatives revolve around four themes: employment, skill development, MSMEs, and the middle class. Though the themes address different groups, they will ultimately influence middle- and lower-income households directly or indirectly. The attractive provisions for middle-class householdsin this year’s Budget are as follows:
Regarding employment and skill development initiatives, employers will receive Rs 3,000 monthly for two years for each additional employee hired. Under an employment-linked skilling scheme, first-time employees will get a salary of one month, up to Rs 15,000. Additionally, one crore youth will have internship opportunities in the top 500 companies with an allowance of Rs 5000 per month and Rs 6000 as one-time assistance. An investment of Rs 10 trillion in urban housing development aims to address the needs of 10 million urban poor and middle-class families. Efforts will focus on creating efficient and transparent rental housing markets, ensuring better living conditions and affordability.
The new TDS policies aim to simplify the tax process, providing relief to both businesses and consumers. The TDS on e-commerce transactions has been significantly reduced from 1% to 0.1%, easing the financial burden on online companies and consumers. The general TDS rate has also been cut from 5% to 2%, meaning less tax will be deducted from various financial transactions. These changes bring a sense of relief and simplicity to the tax process, benefiting both businesses and consumers.
However, middle-class taxpayers closely monitor the income tax slab. For them, budget means tax deductions. There are marginal provisions in the new tax regime to give some relief to taxpayers. The new tax slabs are as follows: up to Rs 3 lakh: Nil; Rs 3 lakh to 7 lakhs: 5%; Rs 7 lakh to 10 lakhs: 10%; Rs 10 lakh to 12 lakhs: 15%; Rs 12 lakh to 15 lakhs: 20%; and above Rs 15 lakh: 30%. The standard deduction for salaried individuals increased from Rs 50,000 to Rs 75,000, and the deduction from family pension increased from Rs 15,000 to Rs 25,000. Salaried employees could save up to Rs 17,500 under the new tax regime.
Despite the adjustments, many taxpayers had hoped for more substantial tax cuts to increase disposable income, particularly for those earning between Rs 5 lakh to 15 lakhs annually. Unfortunately, no such measures were announced. The Budget often means looking for tax deductions, and this year’s Budget does not seem to have made any revolutionary changes to the tax base. Although there are marginal changes in the new tax regime, they are insufficient to address the consequences of inflation. The lack of salary adjustments proportional to inflation will place a heavier burden on individuals, highlighting the inadequacy of the current tax regime.
The increase in long-term capital gain tax from 10% to 12.50% and short-term capital gain tax from 15% to 20% demotivates the middle class and affects their savings prospects. The Budget this year does not provide significant relief to taxpayers. The Prime Minister claims it’s a middle-class-friendly budget, but there seem to be no beneficial provisions for middle-class households. The government appears to focus only on increasing tax returns when revising the tax slabs, completely ignoring the impact of the rising inflation rate on household budgets. If the government aims to improve the standard of living for lower and middle-income individuals, they should adjust the tax slabs according to inflation.
The increasing inflation rate has significantly reduced the purchasing power of middle-class individuals. Over the past two years, the prices of essential items have nearly doubled. Experts say Rs 500,000 from 10 years ago would be equivalent to Rs 254,000 today, considering a 7% annual inflation rate. It means that goods that cost 1,000 rupees previously now cost almost Rs 2,000. In India, the inflation rates for medical and education expenses are rising, with a medical inflation rate of 14%, surpassing other South Asian countries. Despite this, there has been no change in the deduction limit on health insurance premiums under section 80D. The escalating healthcare costs have significantly impacted household budgets, leading to reduced spending on essential goods and services and, ultimately, pushing many families into poverty.
The Cost Inflation Index is a measure used by the government to track the annual rate of price increases caused by inflation. This index rose from 240 in 2014 to 363 in 2024-25, an increase of almost 51%. If the government revises the tax slabs in line with the inflation rate, it could help lessen the financial burden on middle-class households. Relying solely on middle-class taxpayers for revenue is not sustainable; the government should explore other sources of income and diversify its tax resources. Given that the middle and lower-income classes are the primary consumers in India, imposing additional direct tax burdens on them would not be a suitable strategy for a progressive democratic country like India.
(The authors are PhD Scholar and Assistant Professor Department of Econometrics Department of Economics University of Madras CHRIST (Deemed to be University) Chennai Bangalore)
Follow our WhatsApp channel
