As Budget 2026 approaches, the debate around personal income tax cuts has intensified. With consumption slowing and middle-class households facing sustained cost pressures, expectations are rising that the government may announce further personal income tax cuts to boost disposable income. At the same time, policymakers are under pressure to maintain fiscal discipline and ensure macroeconomic stability. The key question, therefore, is whether Budget 2026 will prioritise personal income tax cuts or continue to tread cautiously on taxation.
India’s economic backdrop provides context to this debate. According to the International Monetary Fund (IMF), India became the world’s fourth-largest economy by nominal GDP in 2025, surpassing Japan, and is projected to become the third-largest economy by 2027–28. The IMF also continues to recognise India as the fastest-growing major economy globally. Despite this strong growth outlook, the decision on personal income tax cuts cannot be viewed in isolation.
The Fiscal Discipline Argument
One of the strongest arguments against aggressive personal income tax cuts is the need to preserve fiscal discipline. India’s fiscal deficit has steadily declined from 5.6% of GDP in 2023–24 to 4.8% in 2024–25, with a target of 4.4% for 2025–26. This is a significant improvement from the pandemic period, when the deficit touched nearly 9.5%.
Fiscal deficits are not inherently negative, especially for developing economies. However, persistent high deficits can lead to inflationary pressures, increased borrowing, and potential currency risks. Personal income tax cuts, while politically attractive, reduce government revenue in the short term and may force higher borrowings to bridge the gap between revenue and expenditure.
There is also a direct relationship between fiscal deficits and inflation. Personal income tax cuts increase disposable income, putting more money in the hands of consumers. If supply does not increase proportionately, this can result in higher inflation, particularly in a consumption-driven economy like India’s.
Why Fiscal Discipline Still Matters
Maintaining fiscal discipline is not only important domestically but also from a global perspective. Sovereign credit ratings and investor confidence depend heavily on a country’s ability to manage public debt. The IMF has repeatedly warned that public debt exceeding 100% of GDP raises serious concerns. Excessive reliance on personal income tax cuts without alternative revenue measures could weaken India’s fiscal credibility and increase borrowing costs.
From this standpoint, policymakers remain cautious about prioritising personal income tax cuts in Budget 2026, especially when large infrastructure and social expenditure commitments remain.
The Personal Income Tax Cuts Paradox
Despite these concerns, there is a compelling case in favour of personal income tax cuts. Historical data suggests that lower personal income tax rates often lead to higher compliance. When personal income tax cut are accompanied by simpler tax slabs and reduced complexity, more individuals are encouraged to file returns, expanding the tax base.
India has already experimented with this approach through the introduction of the new tax regime, revised slabs, and higher exemption thresholds. While the maximum tax rate has remained around 30% for over two decades, successive governments have used selective personal income tax cuts and exemptions to ease the burden on taxpayers.
However, inflation has diluted the real benefits of many past personal income tax cuts, particularly for the middle class. As living costs rise, disposable income gains from tax relief often feel marginal, reinforcing demands for further in Budget 2026.
Striking the Right Balance in Budget 2026
The central challenge for Budget 2026 is to strike a balance between personal income tax cuts and fiscal prudence. Middle-class taxpayers expect meaningful relief, while the government must ensure sufficient revenue to fund investments in infrastructure, education, healthcare, and social security.
Recent years have seen higher dividends from the Reserve Bank of India supporting government finances, but such inflows may not be sustainable in the long term.
Ultimately, Budget 2026 is unlikely to pursue more probable approach is targeted relief—fine-tuning tax slabs, raising exemption thresholds, or offering limited personal income tax cuts within the new tax regime—while keeping the fiscal deficit under control.
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