Nirmala Sitharaman Unveils Significant Tax Cuts for Middle Class in Reformist Budget

Finance Minister Nirmala Sitharaman has announced substantial income tax reductions for the middle class, alongside a plan for future reforms aimed at a developed India. The tax exemption limit has been increased from Rs 7 lakh to Rs 12 lakh annually, meaning individuals earning up to this amount will not pay taxes. Additionally, a standard deduction of Rs 75,000 is available for salaried individuals.

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The new tax structure aims to benefit over 6.3 crore taxpayers, or more than 80% of them. This change is expected to significantly reduce taxes for the middle class, leaving more disposable income for consumption, savings, and investment. Sitharaman presented this budget as a reformist one for the upcoming fiscal year in the Lok Sabha.

Investment and Infrastructure Focus

The budget also proposes raising the foreign investment limit in the insurance sector from 74% to 100%. It continues with infrastructure spending while increasing allocations for social sectors and measures for the poor, youth, farmers, and women. Despite these initiatives, the fiscal deficit is projected to be 4.4% of GDP in FY26, down from an estimated 4.8% this year.

Prime Minister Narendra Modi described the budget as one that fulfils every Indian's dreams and acts as a force-multiplier for consumption, investment, and growth. He stated that it lays a strong foundation for increasing savings and making citizens partners in development.

Economic Growth Amid Global Challenges

Sitharaman's budget includes proposals to boost both consumption and investment, aiming to enhance domestic economic activity amidst global uncertainties. The focus remains on infrastructure development while providing support to MSMEs and the agricultural sector. Duty cuts on intermediaries and certain life-saving drugs were also announced.

To offset revenue losses, capital spending is set at Rs 11.21 lakh crore for the next financial year, up from Rs 10.18 lakh crore this year. Increased dividends from the Reserve Bank and other government-owned financial institutions are expected to help contain losses.

Addressing Economic Slowdown

The budget comes as India's economy grows at its slowest pace since the pandemic amid rising geopolitical risks, including potential tariffs from US President Donald Trump. The GDP growth estimate is 6.4% for this fiscal year and between 6.3% and 6.8% next year, below the 8% needed to make India a developed nation by 2047.

Sitharaman emphasised keeping the fiscal deficit such that central government debt declines as a percentage of GDP, projecting debt at 50% of GDP by March 2031.

Additional Measures Announced

Other measures include a national mission to promote high-yielding crops like pulses and cotton, increasing subsidised credit limits for farmers from Rs 3 lakh to Rs 5 lakh, missions to boost manufacturing and exports, a new policy for labour-intensive sectors like leather and footwear, and a scheme to make India a global toy manufacturing hub.

The finance minister also announced social security coverage for nearly 1 crore gig workers and a Rs 10,000 crore fund of funds for startups. A target of at least 100 gigawatts of electricity from nuclear energy by 2047 was set, along with amendments to nuclear liability regulations to allow private sector investment.

Tax Reforms and Reliefs

Sitharaman announced duty reductions on various goods including open cells and exempted critical minerals like cobalt and lithium-ion battery scraps from import duty. She proposed raising the threshold for tax collected at source on remittances under RBI's Liberalised Remittance Scheme from Rs 7 lakh to Rs 10 lakh, benefiting travel and foreign exchange sectors.

Rationalising TDS provisions included increasing thresholds across various provisions ranging from Rs 5,000 to Rs 50,000. The TDS threshold on rent rose from Rs 2.40 lakh to Rs 6 lakh. Higher TDS/TCS rates now apply only to non-filers.

Expert Opinions on Budget Impact

Christian de Guzman from Moody's Ratings commented that due to a dampened macroeconomic backdrop compared to recent years, fiscal consolidation has slowed to support growth. Tax relief measures have constrained revenue growth since 2022-23; thus falling expenditure as a share of GDP has borne much of the fiscal deficit narrowing despite sustained capital expenditure emphasis.

The Union government remains on track with near-term policy goals but lacks sufficient improvement in debt burden or budget allocation for debt servicing compared to its investment-grade peers.