Union Budget 2025–26 — Middle-Class Tax Relief and the Consumption Revival Strategy

Union Budget 2025–26 places India’s middle class firmly at the centre of its economic strategy. At a time when urban consumption has softened and household sentiment has shown signs of fatigue, the government has used personal tax relief as a direct policy lever to revive demand. These measures are expected to influence not just spending behaviour, but also savings patterns and investment choices for households looking to invest in bond instruments as part of a more stable financial plan.

Why Consumption Has Become a Policy Priority

Household consumption accounts for a significant share of India’s GDP and has historically acted as a key driver of economic growth. In recent quarters, however, consumption—particularly in urban areas—has moderated due to higher living costs, cautious discretionary spending, and uneven income growth. This slowdown prompted policymakers to focus on boosting disposable income to restore spending momentum without resorting to unsustainable fiscal expansion.

Union Budget 2025–26 addresses this challenge by easing the tax burden on individuals, thereby increasing cash in hand and supporting demand across consumption-led sectors.

Expanded Tax Relief Under the New Regime

The most impactful announcement in the budget is the expansion of income tax relief under the new tax regime. The exemption threshold has been raised from ₹7 lakh to ₹12 lakh, with an effective exemption of ₹12.75 lakh for salaried individuals after accounting for the standard deduction.

This change is expected to benefit a large proportion of income taxpayers and deliver meaningful annual tax savings. For many middle-income households, the additional disposable income can translate into higher spending on essentials and discretionary items, helping revive demand across sectors such as FMCG, automobiles, consumer durables, travel, and services.

Marginal Relief and Smoother Tax Transitions

Recognising the risk of sharp tax burdens for individuals earning slightly above the exemption threshold, the budget introduces marginal relief for incomes up to a specified limit. This ensures that taxpayers do not face a disproportionate increase in tax liability for marginal income increases.

Such design improvements enhance fairness and improve acceptance of the revised tax structure. By smoothing transitions, the government reduces behavioural distortions and ensures that tax relief measures translate more effectively into consumption rather than precautionary saving.

Impact on Household Spending Behaviour

Higher disposable income is expected to provide a near-term boost to consumption. As inflation pressures ease and monetary policy turns more accommodative, the combined effect of tax relief and improving macro conditions could support a gradual revival in demand.

Consumption-led sectors are likely to benefit first, but the ripple effects may extend further. Improved demand visibility can encourage businesses to expand capacity, support employment, and stabilise cash flows—creating a positive feedback loop for economic growth.

Implications for Household Savings and Investment Choices

While a portion of incremental income is likely to be spent, another portion may flow into savings. Traditionally, Indian households have favoured bank deposits during periods of uncertainty. However, with evolving financial awareness and a wider range of fixed-income options, households may increasingly diversify into debt instruments that offer better risk-adjusted returns.

As savings rise alongside consumption, the allocation between deposits, small savings schemes, and market-linked fixed-income products will depend on interest-rate cycles, liquidity needs, and risk appetite.

BFSI Measures Supporting Credit Expansion

The budget complements tax relief with several BFSI-focused initiatives aimed at improving credit access and financial inclusion. These include enhanced loan limits under Kisan Credit Cards, expanded housing support under PMAY-U 2.0, revamped PM SVANidhi with UPI-linked credit cards, and a reduction in TDS on income from securitisation trusts.

In addition, the rollout of a simplified KYC framework and a revamped Central KYC Registry is expected to reduce onboarding friction across financial institutions. Together, these measures can support smoother credit flows, benefiting households, MSMEs, and the broader financial system.

Broader Implications for Capital Markets

Stronger consumption and improved credit availability can have positive spillover effects on capital markets. As corporate revenues stabilise and cash flows improve, issuer credit profiles may strengthen, supporting healthier participation in debt markets over time.

For fixed-income investors, a consumption-led recovery can translate into improved confidence in issuer fundamentals, particularly in sectors linked to domestic demand.

Translating Policy Signals into Investment Decisions

As households reassess their savings and investment priorities in light of higher disposable income, platforms like Altifi help bridge the gap between policy outcomes and practical choices. By offering structured access to fixed-income instruments and presenting key details transparently, Altifi enables investors to evaluate options aligned with income needs, risk comfort, and evolving market conditions.

Conclusion

Union Budget 2025–26 uses targeted tax relief as a catalyst to revive middle-class consumption while maintaining fiscal discipline. By improving disposable income and supporting credit expansion, the budget aims to restore demand momentum and strengthen economic resilience. As savings patterns evolve alongside consumption, investors can confidently invest online in fixed-income instruments that align with changing household income dynamics and long-term financial goals.