In a significant move aimed at easing the financial burden on the middle class, India’s Finance Minister Nirmala Sitharaman announced that annual earnings up to INR 1.2 million will now be exempt from income tax. 

The announcement was made on February 1 while presenting the Union Budget for the Fiscal Year 2025/26, which begins on April 1.

Sitharaman emphasized that democracy, demography, and demand are the key pillars supporting India's journey toward becoming a “Viksit Bharat” [Developed India] and highlighted the middle class as the backbone of the country’s economic growth. 

She stated that Prime Minister Modi’s government has consistently recognized and supported middle-class taxpayers by periodically reducing their tax burden.  

Providing a historical perspective, Sitharaman noted that in 2014, the nil tax slab was raised to INR 250,000, then to INR 500,000 in 2019, and further increased to INR 700,000 in 2023. Now, she announced that under the new tax regime, there will be no income tax on earnings up to INR 1.2 million. For salaried taxpayers, this tax-free threshold extends to INR 1.275 million due to a standard deduction of INR 75,000. 
 
Additionally, she introduced changes in tax slabs and rates that “would benefit all taxpayers”.  

Under the existing tax regime, the basic exemption limit is INR 300,000, with annual income between INR 300,000 to INR 1.5 million taxed between 5% and 20%, and income exceeding INR 1.5 million taxed at 30%.

Under the new tax regime, income up to INR 400,000 will now be tax-free, while income between INR 400,000 and INR 2.4 million will be taxed at 5% to 25%. Income exceeding INR 2.4 million will be taxed at 30%. 

The revised tax slabs include 5% for income between INR 400,000 and 800,000, 10% for INR 800,000 to 1.2 million, 15% for INR 1.2 million to 1.6 million, 20% for INR 1.6 million to 2 million, and 25% for INR 2 million to 2.4 million.

Sitharaman assured that taxpayers earning up to INR 1.2 million would receive a full rebate, ensuring zero tax liability. Those earning INR 1.8 million will benefit from a tax reduction of INR 70,000, translating to a 30% reduction compared to the existing tax rates. 

She also emphasized that this tax relief would increase household disposable income, thereby boosting consumption, savings, and investment.  

The Modi administration has faced criticism for failing to address broader middle-class concerns, especially amid rising living costs and slowing economic growth. YouTuber Dhruv Rathee, who has over 27 million subscribers and is known for his fact-based analysis, recently claimed in a video titled “Why Middle Class in India is DYING?” that 1.6% of India’s population bears 30% of the total tax burden. 

Rathee accused the government of favoring corporations while squeezing the middle class through taxation. Rathee argued that losses incurred by government policies benefiting large corporations are now being compensated through higher taxes on common citizens.  

India, the third-largest economy in Asia and the fifth-largest globally , is projected to grow at its slowest pace in four years. Inflation reached a 14-month high in October 2024, according to the Ministry of Statistics and Programme Implementation (MoSPI). These economic challenges have fueled concerns about the effectiveness of the government's fiscal policies.  

Sitharaman concluded her speech by revealing that the government will forgo INR 1 trillion in direct tax revenue and INR 26 billion in indirect tax revenue as a result of the new income tax reforms.