India considers cutting personal income tax to lift consumption

India is considering cutting income tax for individuals making up to 1.5 million rupees ($17,590) a year in February's budget to provide relief to the middle class and boost consumption as the economy slows, two government sources told Reuters.

The move could benefit tens of millions of taxpayers, especially city dwellers burdened by high living costs, if they opt for a 2020 tax system that strips exemptions like housing rentals.

Under that system, annual income of 300,000 rupees to 1.5 million rupees is taxed at between 5% to 20%. Higher income draws 30%.

Indian taxpayers can choose between two tax systems - a legacy plan that allows exemptions on housing rentals and insurance and a newer one introduced in 2020 that offers slightly lower rates but does not allow major exemptions.

The sources, who did not want to be named because they were not authorised to talk to the media, said they had not decided on the size of any cuts. A decision would be taken closer to the budget on 1 February, they said.

The finance ministry did not immediately respond to an email seeking comment.

The sources declined to share revenue loss of any tax cut but one said reducing tax rates would make more people choose the new system that is less complicated.

India gets a bulk of its income tax from persons earning at least 10 million rupees, the rate for which is 30%.

More money in the hands of the middle class might help rev up the economy, the world's fifth-biggest and which grew at its slowest pace in seven quarters between July and September. High food inflation is also biting into demand for goods ranging from soaps and shampoos to cars and two wheelers, particularly in urban areas.

The government has also been facing political heat from the middle class over high taxes, and as growth in wages is unable to catch up with the pace of inflation.

($1 = 85.2710 Indian rupees)