Impact Of Indian Tax Policies On Middle-Class Families: Evidence From Direct Taxes, GST, And Household Consumption Data

Written by: Sneha Suresh Rungta, University of Mumbai, Ashadeep Adhyaapak Mahavidyalaya, Nallasopara, Maharashtra, India

&

Kamlesh Kumar, Assistant Professor, University of Mumbai, Ashadeep Adhyaapak Mahavidyalaya, Nallasopara, Maharashtra, India

Abstract

The tax system significantly influences the standard of living of the middle classes in India in three primary ways: (i) through direct taxes on income (including personal income tax, surcharge, cess, and payroll-based compliance requirements); (ii) through indirect taxes (particularly the Goods and Services Tax (GST) and excise duties); and (iii) through the interaction between tax design and broader economic factors such as inflation, housing costs, and household consumption baskets. This paper synthesises recent policy changes and empirical literature to assess the impact of Indian tax policies on disposable income, consumption, savings, and perceived fairness among middle-class families. It examines key mechanisms and documents distributional implications using secondary evidence from the Income Tax Department’s Budget FAQs and tax slabs, reports by PRS Legislative Research, GST Council rate rationalisation documents, and household consumption fact sheets published by the Ministry of Statistics and Programme Implementation (MoSPI). The findings suggest that recent income-tax relief measures, particularly the increase in the tax-free threshold through the Section 87A rebate and the enhancement of the standard deduction under the new tax regime, have increased post-tax income and may stimulate consumption among lower and lower-upper middle-income segments. At the same time, these changes reduce the relative advantage of deduction-intensive tax planning under the old regime. Indirect tax reforms that reduce rates on mass-consumption goods and certain aspirational durables can lower the cost of living. However, consumption taxes are structurally regressive when measured against annual income, particularly where essential goods constitute a larger share of household budgets. Administrative complexity and compliance costs also play a significant role. Evidence indicates that compliance burdens are not trivial, and simplification of procedures can generate welfare gains beyond the effect of tax rate changes alone. The paper concludes by proposing policy alternatives, such as improved indexation to inflation, better targeting of GST relief, and a reduction in compliance costs, that can enhance the welfare of middle-class households without compromising revenue adequacy.

Keywords: Indian tax policy, middle-class welfare, direct taxation, income tax reform, Union Budget 2025–26, Section 87A rebate, standard deduction, tax-free threshold, tax incidence, disposable income, GST rationalisation, indirect taxation, cost of living, household consumption, HCES 2022–23, compliance costs, tax administration, progressivity, fiscal policy, public finance, India

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