The Reserve Bank of India (RBI), in its latest bulletin released on February 19, 2025, highlighted that the tax relief measures announced in the Union Budget 2025-26 and easing inflation are set to strengthen household consumption and investments. Newly appointed RBI Governor Sanjay Malhotra reiterated this assessment during the February Monetary Policy Committee (MPC) meeting.
Rs 1 Lakh Crore Tax Relief to Benefit Middle-Class Taxpayers
The Union Budget 2025, presented by Finance Minister Nirmala Sitharaman on February 1, has introduced a direct tax relief of Rs 1 lakh crore, primarily aimed at middle-class taxpayers. This move is expected to increase disposable incomes, subsequently driving savings, investments, and consumption.
On the indirect tax front, the Budget introduced customs duty revisions to streamline tariffs and correct duty inversions. The gross tax-to-GDP ratio is now budgeted to rise to 12% in 2025-26, marking its highest level since 2007-08.
Key Tax Reforms in Union Budget 2025-26
- Increase in Tax-Free Income Limit: The new tax regime's exemption threshold has been raised from Rs 7 lakh to Rs 12 lakh.
- Revised Income Tax Slabs: Adjustments have been made across all income brackets to offer further relief to taxpayers.
- Revenue Impact: The government is expected to forego Rs 1 lakh crore in direct tax revenues, along with Rs 2,600 crore in indirect tax relief.
Boost to Household Consumption and Investments
The RBI bulletin emphasized that the tax cuts will enhance disposable incomes, leading to higher consumer spending and investments. The government's focus remains on maintaining quality expenditure, with the capital expenditure-to-GDP ratio projected to improve to 4.3% in 2025-26, up from 4.1% in 2024-25 (RE).
MPC Highlights Economic Outlook
In the February MPC meeting, Governor Malhotra noted that rural demand is on the rise, while urban consumption continues to show mixed trends. However, favorable employment conditions, tax relief measures, moderating inflation, and robust agricultural output are expected to support strong household consumption.
The MPC statement also reaffirmed this outlook, stating that household consumption will remain resilient, largely due to the tax relief measures in the Union Budget 2025-26.
As the Indian economy gears up for the new fiscal year, the combination of tax cuts, stable inflation, and improving employment conditions is expected to provide strong momentum to consumption-led growth.
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