The latest budget is out in India. The big talking point is the income tax rebate on incomes up to 12 lakh per annum (all figures in INR). The key target for this is the middle class that was throwing rocks at the government through memes and YouTube influencers.
The change in thinking is to move away from Government spending to private consumption by giving those that pay income tax more money at the end of the month.
The net benefit from this tax is about 80k per year for income tax payers with incomes up to 12 lakh pa. As your income goes above 12 lakh pa there is a sharp drop and then a gradual increase to a maximum of 1.1 lakh pa benefit if your income is 25 lakh pa
There are couple of things to understand to put this change in context.
Firstly…
This does not put money in your hands today. It is something you will get from April 2025 onwards as part of your monthly pay. So we should see that extra money in people’s hands ready to spend by end of March 2026! So this number will start to influence future outlook when it comes to stocks and other investments. The market will start to factor this today even if the full impact is not felt till the next year.
Secondly…
We need to think about the perception of increased money in our accounts before the actual accumulation happens. The ‘Annual Benefit’ column in the table below shows the amount people will start to feel richer by straightaway. But that money is not available to them today even though they are mentally already factoring it into their consumption decisions.
| Annual Salary (INR) | Annual Benefit (INR) | Monthly Benefit (INR) | Percentage of Annual Salary |
| 8,00,000 | 30,000 | 2,500 | 3.8% |
| 12,00,000 | 80,000 | 6,666 | 6.6% |
| 15,00,000 | 35,000 | 2,916 | 2.3% |
| 25,00,000 | 1,10,000 | 9,166 | 4.4% |
About Behaviours
Now if the aim is to boost private consumption then we need to understand what factors could influence the strength of the boost. And a lot of it will be behavioural factors. Let us understand the factors one by one.
Perception of Future Income
Remember the full amount is not available till March 2026. What will be economic prospects by then? Would India be reeling under the impact of Trump’s trade war or will we find other options for our goods (remember India enjoys a trade surplus with the US – one of the few countries we do so).
If prospects of future income are strong then I will be less hesitant in spending without worrying about the future (e.g., by borrowing – which is likely to get a boost with reduction in interest rates).
If prospects of future income are weak then I will use the money to build up a buffer. This money if invested in the stock markets is likely to have a positive impact. If saved in fixed deposits it will encourage investment by the banks (private investment).
Inflation
With more money in people’s hands and reduction of interest rates will this push inflation outside the RBI’s comfort zone of 4% (+/- 2%)? Currently it is holding at slightly above 5% not too far away from the 6%.
If people expect prices to rise by 4% even then that wipes out most gains made through tax breaks (see above table). This is because incomes have not risen at the same rate as prices over the last few years and there were some serious signs of dropping consumption which also reduced the GDP forecasts for FY 2025.
Spending Priorities
Given this perception of more money coming in, if critical businesses like schools and hospitals increase their prices (or there is a perception of possible price increase – see Inflation above) then people will use the extra money coming in every month to fill any funding gaps between the incoming and outgoing.
Even if this is used to ‘loosen’ the belt to go back to consuming what they had to give up then we are likely to see some short term increase in prices as industries in India ramp up production.
Investments
For those who have a decent gap between incoming and outgoing already they will start getting busy finding new avenues to invest their money. Crypto is a no-go because of tightening regulation. That leaves traditional savings products or the stock market.
Non-Essential Spending
This is perhaps the most interesting variable because even though the segment that have decent separation between incoming and outgoing is a small piece of the pie, in absolute numbers they will form a large segment.
These are the people who won’t hesitate now (as the Government hopes) in increasing their spending on non-essentials as they already have some cushion when it comes to the essential spending. For example, because they do not have kids, or they have multiple sources of income (e.g., parent’s pension, husband and wife both work), or they are not paying home instalments (e.g., living in parental home).
This may allow them to consume more takeaways, buy a more expensive car (with a higher monthly loan – from April 2025), or even take that one extra holiday this year.
A Better Solution
My focus would have been towards enabling the women of India. India cannot fulfil its dreams of becoming a developed country till we don’t enable our women. Currently female labour-force participation is quite low in India (about 33%). The income gap is also quite large where for every INR 100 earned by a man in India, a woman earns INR 40.
So if I was advising our honourable Finance Minister – I would have advised her to give all women 100% tax rebate till 25 lakh per annum. Given the focus on digitisation and identity I think this could have been done with limited leakage.
Also as women’s income increase they find efficient ways of deploying that money. The living standards of the family go up as does the health of the children and their education levels.
Fish Eye View 