No Tax for Individuals Earning ?12 Lakhs and Below: A Path to Higher Consumption, GDP Growth, and India's Economic Rise

India, the world’s fastest-growing major economy, aspires to sustain an 8% GDP growth rate to solidify its position as the third-largest economy globally. One of the most effective strategies to achieve this is to eliminate income tax for individuals earning ?12 lakh and below, unlocking higher consumption, boosting demand-driven GDP growth, and ultimately enhancing tax revenues through indirect channels like GST. This essay explores how such a tax policy could transform India’s economic landscape, leveraging higher disposable income, increased domestic consumption, and a robust multiplier effect.

1. The Current Tax Structure and Its Impact on Consumption

India’s income tax system collects substantial revenues from individuals, with ?4.86 lakh crore in direct taxes projected for FY 2025-26. Currently, those earning between ?4 lakh and ?12 lakh pay 5% to 10% in taxes, reducing their disposable income. This affects their ability to spend on essential goods, discretionary items, housing, travel, and investments in education and health, thereby limiting overall consumption growth.

Estimated Tax Revenue by Income Bracket (FY 2025-26)

Estimated Total Income Tax Revenue = ?4,86,000 crore+ (~?4.86 lakh crore)

If the government eliminates taxes for incomes up to ?12 lakh, it would put approximately ?1.22 lakh crore (?50,000 crore + ?72,000 crore) back into the hands of consumers. This would significantly increase spending and drive economic growth.

2. How Eliminating Taxes on Lower & Middle-Income Earners Boosts GDP Growth

(a) Increased Consumer Spending → Higher Aggregate Demand

If individuals in the ?12 lakh and lower category keep their full income, the additional spending would significantly boost demand across multiple sectors:

• Retail & FMCG: Higher spending on daily essentials and luxury goods.
• Automobile Industry: Increased demand for cars and two-wheelers.
• Real Estate: More home purchases and housing upgrades.
• Travel & Hospitality: Greater discretionary spending on vacations, restaurants, and services.

With ?3 lakh crore in additional disposable income circulating in the economy, India could witness a direct boost of ~?4.5 lakh crore in GDP, considering a 1.5x consumption multiplier effect.

(b) Higher GST Collections Offsets Direct Tax Losses

• GST is ~12% on average across goods and services.
• If ?3 lakh crore was spent on taxable goods/services, GST revenue would increase: ?3 lakh crore × 12% = ?36,000 crore.
• Even if direct tax revenue drops, indirect tax revenue will compensate a significant portion of it, ensuring fiscal stability.

This shift from direct to indirect taxation aligns with the global best practices, where consumption-driven economies rely more on indirect taxes rather than personal income tax.

(c) Multiplier Effect Accelerates GDP Growth to 8%+

A well-documented multiplier effect exists in economics, where ?1 spent in the economy generates ?1.5 to ?2 in GDP. By freeing up ?3 lakh crore, India's GDP could gain:

• ?4.5 - ?6 lakh crore in additional economic output.
• This would add 1.5% to 2% to GDP growth, making the 8% target more realistic.
• Higher economic activity would create millions of jobs, further stimulating income growth and spending cycles.

By leveraging this strategy, India can create a sustainable cycle of rising incomes, growing demand, and expanding tax revenues from indirect sources.

3. India’s Path to Becoming the World’s 3rd Largest Economy

Currently, India is the 5th largest economy ($3.7 trillion GDP in 2024), behind the US, China, Japan, and Germany. To surpass Germany ($4.5 trillion) and Japan ($4.9 trillion), India needs:

1. 8%+ annual GDP growth sustained for the next 5-7 years.
2. Consumption-driven expansion, given that private spending forms ~60% of GDP.
3. A favorable tax regime that maximizes economic participation.

By removing taxes on incomes up to ?12 lakh, India can:

• Expand domestic consumption, adding 1.5%-2% to GDP annually.
• Achieve an 8%+ sustained growth rate.
• Cross $5 trillion GDP by 2027 and overtake Germany & Japan by 2029.

4. Addressing Concerns: Fiscal Deficit & Government Revenues

(a) Will the Government Lose Revenue?

• Short-term income tax loss (~?1.22 lakh crore) will be offset by higher GST, corporate tax, and economic expansion.
• Government spending can be restructured towards infrastructure, manufacturing, and services to accelerate growth.

(b) Will This Increase the Fiscal Deficit?

• No, because higher GDP and tax revenues will balance it.
• Countries like the US, UK, and Singapore have successfully shifted to consumption-based taxation with strong GDP growth.

Conclusion: A Bold, Growth-Oriented Tax Reform for India’s Future

A tax-free income threshold of ?12 lakh is not just about relief for the middle class—it is a strategic move to accelerate India’s consumption, GDP growth, and global economic ranking.

By shifting from income tax dependence to consumption-based taxation, India can create a dynamic, self-sustaining economy that fuels long-term prosperity. It is time for bold tax reforms to unlock India’s full economic potential.