Tax Exemption Limit Increase Affects Less Than 2% of the Population

February 2, 2025

Finance Minister Nirmala Sitharaman unveiled India’s full-year budget in Parliament on Feb. 1. The budget seems to fall short of directly addressing critical economic challenges that impact the vast majority of the country’s populace, including youth unemployment, stagnating wages and widening income inequality.

A significant aspect of the budget is the effort to increase disposable income for middle-income earners by raising the tax exemption limit to 1.2 million rupees of annual income, excluding specific categories such as capital gains. Consequently, individuals earning up to 100,000 rupees per month will be exempt from paying any income tax.

The government believes that these tax measures will revive spending, particularly on goods and services. For instance, families might decide they can afford a better phone or an extra outing, thus boosting local businesses and spurring more economic activity.

However, only a small fraction of Indians pay income taxes, so the effect on overall consumption may not be as sweeping. During a parliamentary session in December 2024, Finance Minister of State, Pankaj Chaudhary, revealed that only 6.68% of the country’s population filed income tax returns (ITRs) for the fiscal year 2023-24. Moreover, the majority of these filers did not fall into the taxable income slab. In 2023, only 1.6% of the population actually paid income taxes.

The budget refers to job creation through small and micro industries, proposing a support package of 1.5 trillion rupees over five years. The government has redefined Micro, Small and Medium Enterprises (MSMEs), now classifying companies with turnovers up to 5 billion rupees as MSMEs. This change has raised concerns among micro and small-scale enterprises.

C.K. Mohan, president of the Tamil Nadu Small and Tiny Industries Association (TANSTIA), fears that benefits and bank credits intended for smaller players might be diverted to larger enterprises. Speaking to The Times of India, he notes that over 90% of MSMEs in India have turnovers below 30 million rupees and could be adversely affected by this reclassification.

Support for small industries may help because these businesses employ a large portion of the workforce, especially in manufacturing and services. However, to ensure more job creation, a combination of financial support and regulatory reforms with effective implementation is required.

Meanwhile, the budget proposes healthcare benefits for gig workers under the Pradhan Mantri Jan Arogya Yojana national health insurance scheme, and identity cards via the government’s e-Shram portal. The measure is expected to assist nearly 10 million gig workers, according to the finance minister.

One of the main goals repeated in the budget is reducing the fiscal deficit to 4.4% of GDP by 2026. This means the government intends to reduce the gap between what it earns and what it spends, a move that could reassure global credit agencies.

However, the aim of financial stability could lead to cuts in social spending, pointing to lower allocations in areas like school education, higher education and rural employment. People who rely on services funded through these programmes worry that the government’s strategy may leave them with fewer resources, especially at a time when unemployment figures remain high and wage growth is minimal.

On the expenditure front, the government’s continued commitment to capital expenditure—money used to build or improve infrastructure such as roads and railways—shows an attempt to keep the development engine running. Capital expenditure is meant to create and improve long-term assets and can generate employment in sectors like construction. If it lags, it can lead to slower job growth and fewer opportunities for informal workers hoping to transition into higher-wage positions.

However, as former Reserve Bank of India (RBI) Governor Raghuram Rajan pointed out at the World Economic Forum Annual Meeting 2025, the government’s focus on infrastructure alone is not enough to drive long-term growth. He mentioned the need for greater investment in developing people's skills and well-being through enhanced education and healthcare systems. Building human capital, Rajan noted, boosts confidence, spending, and ultimately leads to more robust economic progress.