Finance Minister Nirmala Sitharaman’s next Budget, mere weeks away, must move away from the politically attractive notion of focusing only on the poor. The government must instead prioritise two things: revising what it considers to be the middle class, and targeting tax incentives for this group. Currently, the accepted definitions of the middle class exclude the real prime movers of economic growth.
In short, there’s a significant proportion of the population that is earning more than the current definitions of the middle class, but is hardly rich by any real sense once the expenses of life are factored in.
This is the bracket, earning up to Rs 1 crore a year, that needs a shot in the arm — both for the economy as well as the mood of the nation.
Revise middle class definition
First, the government needs to think long and hard about what it considers to be the middle class. Political economist Milan Vaishnav, in a 2017 paper, provided a handy table capturing the various estimates that existed at the time.
Existing literature seems to define the Indian middle class as comprising individuals whose incomes range from $3,650 a year – which at current exchange rates would be just Rs 3.1 lakh – to Rs 10 lakh a year. This is a ridiculously outdated estimate, especially when it comes to the upper limit.
Under the old tax regime, which is still in force today, an income of more than Rs 10 lakh attracts the highest tax slab of 30 per cent. The new regime raised this limit to Rs 15 lakh, which is hardly an improvement. Basically, according to the tax department, you are positively rich if you earn this amount. And this notion needs to change.
Consider the following statistics from the income tax department: those reporting an income of between Rs 10 lakh and Rs 1 crore a year made up just 3.7 percent of all income tax filers in 2011-12. This proportion jumped to 16.2 percent by 2022-23, more than quadrupling.
This 16.2 percent of the tax filers accounted for one-third of all taxes paid by individuals in 2022-23. Of course, some of this has to do with improved compliance, but that improved compliance should broadly have applied to all other income groups as well. What has happened is that the number of people earning in this bracket — Rs 10 lakh to Rs 1 crore a year — has also grown.
Remember, this is just the income tax filers. The number of people earning in the bracket but not filing taxes is still, unfortunately, far higher.
The second step in revising the conception of middle class is to look at expenditure. The middle class is that group of people that has money left over — once overheads and savings are accounted for — for conspicuous consumption that can drive the economy.
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Analysing consumption patterns
The Household Consumption Expenditure Survey for 2023-24 shows that the average urban household spends about 40 per cent of its total monthly expenses on food. Another six per cent is directed toward education and healthcare, respectively. Conveyance takes up about 8.5 per cent, rent 6.6 per cent, and fuel 5.5 per cent. So, that’s about 65 per cent of expenditure on just normal overheads.
This, of course, is the average. The pervasiveness of education inflation — as richly shown by ThePrint’s Fareeha Iftikhar here and here — means the real cost of education is probably not being captured in official statistics. The same is likely true for healthcare.
But let’s go with the 65 per cent official figure for now. About 30 per cent more goes into spending that’s not exactly regular, but is nevertheless essential, such as clothing, bedding, footwear, and repairs for the house.
For the bracket earning between Rs 10-15 lakh and Rs 1 crore a year, all of these expenses come on top of a 30 per cent tax (not counting the surcharges). It’s no surprise that the Economic Survey 2024 made a point to highlight that household financial savings are falling.
What, also, does this level of taxation leave for conspicuous consumption? Eating out, watching movies, buying consumer goods, traveling, and general consumption expenditure all have to come from a minuscule part of most people’s incomes — if it happens at all.
Now, let’s look at the way tax incentives have so far been structured. Almost all of them in the recent past have been aimed at those earning less than Rs 7-10 lakh a year. This was good, and would have helped those people. But the overall economic stimulus from this was marginal. Incomes in this bracket are just not high enough for the tax cuts to have a meaningful impact on consumption expenditure.
Next, imagine all those earning up to Rs 1 crore had to only pay 20 per cent income tax, down from the 30-40 per cent they have to pay now. The fillip to the economy would be immense. People like to have a good time, and when they can afford it, they do.
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Revenue implications
What about the revenue implications? I had argued in a previous column that the government can’t afford to cut income taxes because both corporate tax and GST have not lived up to their expectations.
I haven’t done the maths on what will happen if the tax rate for the Rs 10 lakh to Rs 1 crore bracket is cut to 20 per cent. But I believe it will be compensated by an increase in GST collections due to higher consumption and a rise in the number of people in this bracket because such consumption propels growth and boosts overall incomes.
The tax officials will, of course, have a better understanding of what the revenue implications will be. But let them at least start thinking about this expanded definition of the middle class, and free themselves from an outdated Rs 10 lakh a year limit.
More importantly, what it will do is change the mood of the economy. There’s a general and pervasive despondency that has set in, fueled in large part by a vocal middle class (my definition) complaining about just how much they pay in tax and how little they get in return in terms of services provided by the government.
Give these people a break. Let their loud voices be raised in the government’s favour. Let them spend. And watch as the mood of the nation changes, and growth comes galloping back.
TCA Sharad Raghavan is Deputy Editor – Economy at ThePrint. He tweets @SharadRaghavan. Views are personal.
(Edited by Zoya Bhatti)
I believe the figure mentioned in the article was either exaggerated to gain traction or based on a misguided understanding of reality.
The post argues that the current definition of the middle class in India is outdated and needs revision. Further, it suggests that the income tax department deems individuals earning above ₹15 lakh annually as “rich” because they fall within the 30% tax bracket. However, this conclusion is unsubstantiated. Are you implying that the threshold for the 30% tax slab is where the tax department considers individuals rich, or that only the wealthy should be paying the highest tax rate? Even then, the argument fails to account for the surcharge, which can push the effective income tax rate to over 50% for incomes exceeding ₹5 crore.
It’s important to note that the government collects direct taxes not only from the rich but also from the middle class, which serves as the backbone of direct tax collections in any economy. The 30% tax rate is far from the maximum effective tax rate and is subject to numerous deductions, particularly under the old tax regime.
The 20% Tax Rate Proposal
The proposal to cap the tax rate at 20% for incomes up to ₹1 crore is, at best, unrealistic. First, let us address the glaringly high threshold. ₹1 crore equates to roughly USD 116,412 (based on the exchange rate as of January 8, 2025). This salary is higher than the average wage in Luxembourg, Switzerland, and the United States. An income of USD 117,000 would place an individual in the top 25% of earners in the U.S. (based on 2022 data). Adjusting this figure using purchasing power parity (PPP), one could argue it would place individuals in the top 5–10% of earners in the U.S. While not an entirely apt comparison, the broader point remains: an annual income of ₹1 crore places individuals in the top income bracket, even in developed nations with significantly higher living costs.
Moving beyond the excessively high threshold, I agree that India’s tax slabs might seem steep. However, it is worth noting that less than 3% of Indians pay income tax. The income tax rate is less than most of western Europe (granted service provided there are much better). As you said you have not done any revenue implication calculation. However, as highest GST rate is 28% its extremely unlikely that consumption will increase enough that tax collection even matches the existing amount.
Lifestyle and Definitions of Wealth
What constitutes being “rich”? Does one need an S-Class Mercedes, first-class travel, and ultra-luxury housing, or is it enough to have a home worth a few crores, multiple cars, the ability to dine out freely, take international vacations, and send children to international schools (IB curriculum)? I believe the latter qualifies as being rich. An annual income of ₹50–60 lakh should comfortably support such a lifestyle. While this may not afford flats in ultra-luxury projects like Oberoi 360 West, DLF Camellias or even simply lower costing luxury projects like Lodha Trump Towers, it is sufficient to purchase a decent 3BHK apartment in the central areas of most Indian cities (excluding Mumbai and Delhi). Ultimately, the definition of wealth is subjective and varies by perspective. By understanding is that a person is rich when externalities will not impact their ability to provide basics for themselves and their family.
Rising Expenses
The post highlights how taxes leave individuals with limited disposable income after covering essential expenses. While elements like inflation and increasing education costs are valid concerns, these disproportionately affect lower-income groups compared to individuals earning ₹15–20 lakh or more. Those earning above ₹20 lakh can sustain a middle-class lifestyle comfortably, while individuals earning above ₹1 crore can maintain a wealthy lifestyle. Living beyond one’s means will always lead to financial strain, irrespective of income. Even celebrities earning millions have faced bankruptcy due to extravagant lifestyles.
Urban-Centric Focus
Yes, cities are expensive. Mumbai, in particular, is notorious for its exorbitant housing costs. However, this is not representative of the entire country. Even in Mumbai’s suburbs, property prices can rival or exceed those in the poshest areas of Bangalore. While ₹1 crore might not afford a luxurious lifestyle in Mumbai, smaller cities offer significantly better value for money. A national tax system, however, cannot have different rates for different cities.
Investments and Luxury Spending
Lastly, investments in the stock market are at an all-time high. Individuals in the 30% tax bracket are more likely to either invest their disposable income or splurge on luxury goods, often boosting foreign companies’ profit margins.
These are my personal opinions and not financial advice. You are welcome to disagree, particularly on the definitions of “rich” and “middle class.”
You have touched upon a very important and oft ignored topic. I tried to roughly calculate the taxes – direct and indirect paid by an individual with a gross annual income of 20L. Assuming he/she has a family of 4 and lives in a big city like Bangalore or Pune, the monthly expenses easily add up to 1L or more. After all the expenses, EMIs and taxes, there is hardly anything left with the person as savings for future or for discretionary expenses. Here’s the brief breakup:
Annual Income: 20Lakhs
Income tax; 2.8L
GST and other indirect taxes @12% : 1.44L
Monthly expenses: 1L
Savings after taxes and expenses: 3.76L
One is barely left with 20% savings. This is assuming a very conservative expense. Should one save for the kids future and post-retirement security or spend on discretionary items with this amount?
The “Babus” who make these policies should get out of their offices and experience the plight of the middle class.
Excellent thoughts, but whose is going to listen! The fisc deficit is the bottom line and the govt has no clue on how to flush in new reforms like Late Mr MS did
Nothing is going to change. This government only knows how to milk the salaried class to the maximum possible extent and give nothing in return.
In India, a significant portion of income goes toward both direct and indirect taxes, leaving little room for personal savings or improvement in living standards. The middle class often feels burdened as they do not receive substantial government benefits, yet bear the brunt of taxation. The focus on poverty alleviation has overshadowed the middle class’s needs, which leads to frustration over the lack of equitable benefits despite their contributions to the economy.