India is considering a reduction in income tax rates for individuals earning up to 1.5 million rupees ($17,590) annually as part of the upcoming budget in February. This potential move aims to provide relief to the middle class and stimulate consumption as the economy faces a slowdown, according to two government sources who spoke to Reuters.

The proposed cuts could benefit millions of taxpayers, particularly in urban areas, where the cost of living is high. If implemented, these individuals could opt for the 2020 tax system, which offers lower rates but eliminates exemptions such as those for housing rentals. Under this system, annual income ranging from 300,000 rupees to 1.5 million rupees is taxed at rates between 5% and 20%, with higher incomes subject to a 30% tax rate.

Indian taxpayers have the option to choose between two tax structures: the older system, which allows for various exemptions like housing and insurance, and the newer system introduced in 2020, which offers slightly reduced rates but eliminates most exemptions. The sources, who wished to remain anonymous due to the sensitivity of the matter, indicated that the exact scale of any tax cuts had not yet been decided, but a final decision would likely be made closer to the February 1 budget presentation. The finance ministry did not immediately respond to an inquiry for comment.

The sources also refrained from sharing the anticipated revenue loss from any tax cuts but suggested that lowering tax rates could encourage more taxpayers to opt for the simpler, newer tax system. A significant portion of India’s income tax revenue comes from individuals earning at least 10 million rupees, who are taxed at the highest rate of 30%.

With the economy growing at its slowest pace in seven quarters, between July and September, more disposable income in the hands of the middle class could help boost domestic consumption. Urban areas, in particular, have been feeling the pinch of high food inflation, which is impacting demand for everyday goods like toiletries, vehicles, and household items. Additionally, the government has been under pressure from the middle class, which is frustrated by high taxes amid stagnant wage growth that fails to keep up with rising inflation.