India reduced income tax rates in its budget on Saturday, providing the middle class with tax relief amounting to Rs1 trillion ($11.5 billion), in a bid to shore up domestic consumption amid growing protectionism worldwide.

People with annual income up to Rs1.2 million ($14,800) will effectively pay no income tax, finance minister Nirmala Sitharaman said, increasing the threshold from Rs700,000, while also reducing the tax rates for those earning above the new cap.

“The new structure will reduce taxes on middle class and leave more money in their hands, boosting household consumption, savings and investment,” Sitharaman said.

The new tax decisions are expected to dent Treasury revenues to the tune of Rs1 trillion. About 63 million people, or 80% of taxpayers, earn up to Rs1 million a year, official data showed.

The budget comes against the backdrop of one of the worst growth rates the country has seen since the pandemic.

In the first advance estimates released three weeks ago, the government projected growth in the current fiscal at 6.4%.

Declining wages and high inflation dragged down consumption, while slowing corporate profits and infrastructure spending in an election year pulled down economic growth in fiscal 2025.

The Indian economy had expanded at an average 8% annually in the past three fiscal years.

The Economic Survey released on Friday showed India is projected to grow in the range of 6.3-6.8% in the next fiscal year beginning 1 April.

The lackluster growth expectations for the next fiscal suggest economic conditions will continue to remain subdued.

Sitharaman’s budget also comes amid rising geopolitical risks as US President Donald Trump threatens widespread tariff measures, which are expected later on Saturday.

Foreign investors have also dumped about $600 billion of India’s stocks in the past month alone, Bloomberg said.

Geopolitical and trade challenges, along with commodity price shocks, pose major headwinds for economic growth, chief economic adviser V. Anantha Nageswaran, who co-authored the Economic Survey, said in the report.

Despite the loss of revenue due to the tax cuts, Sitharaman stuck to the fiscal glide path, announcing a slightly smaller budget deficit for the next fiscal year of 4.4% of gross domestic product (GDP) than the 4.5% previously estimated.

“Our endeavor will be to keep the fiscal deficit each year such that the central government debt remains on a declining path as a percentage of the GDP,” Sitharaman said, signaling a debt of 50% of GDP by March 2031.

This fiscal, amid a general election, the government spent less than what it projected, leading to a smaller budget deficit of 4.8% of GDP, when compared with its earlier estimate of 4.9%.

Next fiscal, capital expenditure is expected to increase by 10% to Rs11.2 trillion.

The government also plans to sell a slightly higher-than-expected gross Rs14.82 trillion ($171 billion) of bonds in FY26.

Higher transfers from the Reserve Bank and government-run financial institutions are expected to partly help offset the decline in tax revenues.

Budget reactions

Christian de Guzman, senior vice-president, Moody’s Ratings, said: “Although the Union government remains on track to meet near-term policy goals, we do not expect a sufficient improvement in debt burden, or the proportion of budget earmarked for debt servicing to change our broader assessment that India’s fiscal strength will remain weaker than most of its investment-grade peers.”

“The budget focused on key areas that will boost consumption. Overall, capex spending planned is in line with expectations. Focusing on MSME will be positive,” Motilal Oswal, group managing director and chief executive of Motilal Oswal Financial Services Ltd, said.

Using cricketing analogy, Oswal said Sitharaman hit “a six in the last over by reducing the income tax on the middle class.”

The budget has come at a time when there are growing concerns of perceived rise in taxation and slowing consumption, Aashish P. Somaiyaa, executive director and chief executive of WhiteOak Capital Asset Management said.

“Financial support to weaker sections and women in recent state elections, the announcement of 8th Pay Commission and now restructured individual tax brackets puts more money in pockets of taxpayers, ushering consumption in the economy,” Somaiyaa said.

“The budget outlined steps towards ease of doing business, reforms to boost tourism, expanding UDAAN scheme, encouraging investment in generation of nuclear energy and encouraging Indian exports,” he added.

“With the launch of a modified UDAN scheme that will introduce 120 new destinations and bring 40 million additional passengers into the fold over the next decade, the aviation landscape is set for a transformative shift,” Ajay Singh, chairman and managing director at SpiceJet, said.

“The initiative will not only make air travel more accessible to remote regions but will also drive economic growth and tourism, further empowering local economies,” he added.

Other highlights from the Budget:

– Measures to assist the poor, youth, farmers and women were included in the budget.

– The nation to rely on atomic energy to meet power needs of at least 100GW by 2047

– The government plans BharatTradeNet, a digital public infrastructure for documenting global trade

– Centre of Excellence on AI for education sector planned with an outlay of Rs500 crore

– Foreign direct investment (FDI) limit in insurance has been hiked from 74% to 100%

– Sitharaman also announced a policy for labor intensive sectors such as leather and footwear, and a scheme to make India a global hub for toy manufacturing

– She announced a plan to provide social security cover for 10 million gig workers

– The government reduced duties on goods including open cells, flat panel displays. Imported critical minerals such as cobalt, scraps of lithium ion will be exempted
– India plans a 100 billion rupee fund of funds for startups

– The loan limit on farm credit card was raised to Rs500,000