The government is reportedly considering reducing income tax for individuals up to Rs 15 lakh per year, benefiting millions of taxpayers living in urban areas.

According to a Reuters report citing government sources, the upcoming Union Budget 2025-26 could provide relief to the middle class and boost consumption. According to the report, the move could benefit millions of people if they opt into the 2020 tax system that removes exemptions such as home rentals.

Under this system, annual income of Rs 3 lakh to Rs 15 lakh is taxed at 5 to 20 percent, with income above 30 percent. Under the new tax regime, income up to Rs 3 lakh attracts 0% tax, followed by 5% tax for the Rs 3-7 lakh bracket, 10% for the Rs 7 lakh bracket -Rs 10 lakh, 15% for the band of Rs. 10-12 lakh, 20% for Rs 12-15 lakh and 30% for Rs 15 lakh and above.

Indian taxpayers now have the option to select between two different tax systems. The first is the legacy plan, which allows exemptions for home rent and insurance, providing some relief to taxpayers in those areas. The second option, introduced in 2020, includes slightly lower tax rates but does not allow for major exemptions. The tax cut could make more people choose the new system which is less complicated.

According to the report, the government has not decided the magnitude of the cuts. The decision would be made closer to February 1.

India gets most of its income tax from people earning at least 10 lakh rupees, who are taxed at 30 percent.

India’s economy, ranked as the world’s fifth largest, saw its slowest growth in seven quarters between July and September. Experts suggest that increased disposable income for the middle class could stimulate economic activity. However, high food inflation is adversely affecting consumer demand in several sectors, including essential items such as soaps and shampoos, as well as automobiles, especially in urban regions.

The government is under political pressure from the middle class, which is burdened with high taxes. This discontent is compounded by the fact that wage growth is not keeping pace with inflation, putting a strain on family budgets.