The decision to revamp the income- tax structure will not lead to inflationary pressures, as the fiscal consolidation path remains intact, finance secretary Tuhin Kanta Pandey has said.
The new framework, designed with a “gradualism” approach, ensures a balanced impact on consumption, savings and investments, Pandey said.
In her Budget for 2025-26, finance minister Nirmala Sitharaman rejiged the income-tax slabs under the new regime while doing away with tax for annual earnings of up to Rs 12 lakh.
“We are on the verge of bringing out a new income-tax bill. What does our structure look like? Is our present structure of tax rate good enough? We thought it was not. We should look at a more forward-looking structure,” Pandey told Moneycontrol in an interview on February 3, as he explaining the rationale behind the revised slabs.
The structure was streamlined to ensure a steady progression of rates without abrupt jumps, the official said.
While presenting the Budget on February 1, Sitharaman said a new tax bill, which would be simpler and easier for taxpayers to understand, would be brought in in a few days.
‘Gradual’ tax slabs
Explaining the shift from the previous tax system, the secretary said the new tax regime eliminates distortions by ensuring a smoother increase in tax rates as income levels rise.
“It is very neat now — 0 to 4 lakh, 4 to 8 lakh, 8 to 12 lakh, and so on. Earlier, the jumps were uneven, from 5 percent to 10 percent and then suddenly to 30 percent. Now, we have brought in a 25 percent slab before 30 percent. The idea is to ensure there are no jerks in taxation,” he said.
While tax cuts will provide relief to the middle class, the government is mindful of their potential impact on inflation.
“We have stuck to our fiscal consolidation path. This Budget does not just stimulate the economy through an increased fiscal deficit. That would have had implications for inflation control. Instead, we have ensured that RBI and the government act in tandem to keep inflation under check,” the finance secretary said.
“If inflation is coming down, we want it to go down further because that will provide room for interest rate cuts. As and when interest rates decline, it will boost both investment and consumption.”
Growth strategy
Rejecting the notion that the Budget is skewed towards either consumption or capital expenditure, he said the government ensured a balanced approach.
“This is a very balanced Budget. Rather than categorising it as a consumption or capital budget, it takes care of both. Consumption, investment, and savings are interconnected. More consumption leads to investment, and investment creates jobs, which in turn promotes consumption,” he said.
The government has significantly increased capital expenditure allocations, with a direct capex of Rs 11.21 lakh crore and another Rs 4 lakh crore provided as grants to states for infrastructure projects. “Almost all of our borrowings are being spent on capex, not on revenue expenditure, making this a non-inflationary Budget,” he said.
Fiscal deficit
The finance secretary reiterated that the government remains committed to fiscal consolidation.
“We had announced that we would reach a fiscal deficit of 4.9 percent of GDP this year, and we have done better at 4.8 percent. Next year, we are targeting 4.4 percent, in line with our long-term roadmap,” he said.
The government also provided projections for the debt-to-GDP ratio under the Fiscal Responsibility and Budget Management (FRBM) framework. “By 2031, we aim for a debt-to-GDP ratio of around 50 percent, with different scenarios outlined in the FRBM statement,” he said.
