But given that India has a small pool of taxpayers, to what extent can the tax cuts spur consumption? Here’s an attempt to put some numbers to it.
PFCE perspective
In her Budget speech, the Finance Minister estimated that the revenue foregone from her personal tax proposals was about ₹1 lakh crore annually. It would therefore be safe to assume that this is the additional money that will land in the hands of taxpayers, after the sharp increase in the exempt income threshold and changes to tax slabs and rates.
Private Final Consumption Expenditure (PFCE), which is the spending on final goods and services by all households, is expected to account for 61.8 per cent of India’s GDP in FY25, as per CSO’s first advance estimates. The value of PFCE in nominal terms is about ₹200 lakh crore. Additional spends of ₹1 lakh crore would thus add about 0.5 per cent to this number. If taxpayers were to splurge all of the ₹1 lakh crore they gain in tax breaks next year, that would add 0.5 per cent to PFCE growth, which was at 12.4 per cent in FY25.
Material tax savings
However, the macro impact of tax cuts appears small mainly because only a fraction of the Indian population files income tax returns and pays income tax. For individuals who do pay tax, the boost from the Budget measures can be significant. As per the Budget, individual taxpayers put together shelled out ₹12.57 lakh crore in income tax in FY25. A ₹1 lakh crore reduction in this outgo translates into an 8 per cent saving.
The break-down of tax savings in the budget documents offers a clearer picture of the savings to be expected at different slabs. For those in the ₹8-10 lakh income bracket, the tax cuts will result in annual savings of about ₹10,000 — a 20-33 per cent saving in tax outgo. For those in the ₹1216 lakh bracket, the savings are in the range of ₹20,000-50,000 a year. For those earning ₹24 lakh and above, the savings are at a significant ₹1.1 lakh a year.
Aiding discretionary buys
Obviously, only the taxpaying population will benefit from the Budget proposals. In terms of numbers, about 7.28 crore folks filed income tax returns in FY25. Of these 5.27 crore filed under the new tax regime and 2.01 crore in the old tax regime. Given that the new regime is now fetching handsome tax breaks, we can assume that more folks will shift to the new regime this year. This suggests that the number of taxpayers (and consumers) who will benefit from the Budget concessions could hover between 5 and 8 crore.
This is a small number in the context of the population. But it should be remembered that the creamy layer of India’s population, which would be the main beneficiary of the raised rebate threshold and tax cuts, is also believed to account for the lion’s share of discretionary spending in India. Anecdotally, India has about 2 crore folks who place orders at food delivery platforms, 5 crore unique mutual fund investors, 11 crore unique demat account holders and so on.
The recent Household Consumption Expenditure Survey published by the NSO (a survey of over 2.4 lakh households pan-India) showed that households falling into the top 5 per cent of respondents in rural India spent six times as much as the bottom 5 per cent in 2023-24t. In urban India, the divide was even higher, with the top 5 per cent households spending 8.5 times what the bottom 5 per cent spent. This suggests that any concessions to the top layer can have a disproportionate impact on spending. Especially as this group is likely to splurge more on discretionary goods and services.
Using HCES to estimate household spends, the bottom 50 per cent households in rural and urban India spent about ₹1.85 lakh a year and ₹3 lakh a year, respectively. Households which spent over ₹5.3 lakh a year in rural India and ₹10 lakh in urban India made it to the top 5 per cent of households in the survey.
Sentiment lift
Beyond the bare numbers, one must also acknowledge that significant tax breaks can deliver a sentiment boost to consumers. Heading into the new financial year, very few income earners will sit down to calculate their tax savings for the year so that they may spend exactly this amount. The feeling that one’s disposable income is now much higher may suffice to lift consumer sentiment and trigger spending on goods and services.
