The reclamation of India’s economy in the past ten years has a lot to do with good household consumption, which is more than 55-60% of GDP. The purchasing power of the people, consisting of the spending of the urban middle class on both necessities and luxuries, is the most important factor for growth.

On the other hand, the increasing taxation, from both direct and indirect sources, has led to the question: Is the Indian middle class getting taxed more and more, and could this result in less urban consumption and a slowdown of the economy?

This post looks into tax statistics, changes in policies, effects on the different income groups, and the fairness of the current tax process, giving special emphasis to the middle-class families living in cities in India.

Tax Structure and Middle-Class Exposure

Direct Taxes

The tax system of India consists of direct taxes (such as personal and corporate income tax) and indirect taxes (mainly GST). Personal income taxes have been growing as a share of government revenue over the years.

• As of the start of 2025, the personal income tax (PIT) collected was growing by about 6-8% every year, even with the introduction of the tax relief by the government in the Union Budget of 2025-26.
• Interestingly, corporate tax collections have recently surpassed personal income tax collections, reflecting strong corporate earnings, but also indicating slower relative growth in individual tax revenue.
• Personal income tax now contributes a significant share of direct taxes, even though only about 4.8% of the adult population files income tax returns and pays tax.

This suggests that a small percentage of the population, mainly those with middle-income and high-income, pay a very large portion of the total income tax. Out of the taxpayers, a very small percentage (approximately 0.3% of the adults) is responsible for paying around 76% of the total personal income tax receipts.

Indirect Taxes

Indirect taxes like the Goods and Services Tax (GST) are levied on consumption and impact everyone who spends on goods and services. Data from the Household Consumption Expenditure Survey (HCES) 2022–23 show:

• The bottom 50% of urban consumers and the middle 30% both bear about 29–30% of the GST burden.
• The top 20% of urban consumers carry around 41% of the GST burden.

This suggests a rather progressive taxation system for GST, but at the same time, it should be pointed out that the distribution of the tax burden among the lower half and the middle classes being almost equal indicates that the tax system is not very progressive, and the middle-income groups still carry a large portion of the burden in consumption taxes.

Effective Tax Rates and Progressivity

According to analyses, India’s taxation system combines a relatively high effective personal income tax rate (after accounting for actual payments and deductions) with indirect taxes that tend to be regressive (shared uniformly regardless of income).

This mix creates an environment in which middle-income urban households pay taxes both on their labour income and everyday consumption, amplifying their perceived burden compared to other sections of the economy.

Middle-Class Squeeze and Urban Consumption Patterns

Impact on Disposable Income

Despite reforms in the 2025–26 Union Budget aimed at tax relief, many middle-class households still feel the pinch:

• The new personal tax regime increased the tax-free threshold to ₹12 lakh, meaning many low-to-middle earners pay little or no direct income tax under the simplified system.
• However, higher-income households just above this limit still pay substantial direct taxes, and indirect taxes (GST) significantly reduce disposable income available for consumption.

Even after the tax relief, the benefit may not fully translate into increased consumption, as many households choose to save rather than spend the additional disposable income, which is a behaviour typical during uncertain economic conditions.

Private Consumption as GDP Engine

India’s domestic consumption contributes a large share to GDP; therefore, any weakening in household spending, especially among the middle class, can have far-reaching implications for growth. In 2025, consumption’s role remained central even as investment slowed.

Yet, anecdotal and quantitative evidence indicate slowing discretionary purchases in urban markets, with consumers focusing on essentials due to inflationary pressures and limited real wage growth. Experts have described this phenomenon as part of a broader “income crisis” limiting consumption demand.

Policy Responses and Their Impact

GST Simplification and Relief

The GST Council reformed the tax slabs in late 2025 and mainly set them at 5% and 18% for most goods and services. The purpose of this change was to bring down indirect tax costs and encourage consumption.

• SBI Research’s report claimed that the reforms might result in consumer spending getting boosted to the tune of ₹1.98 lakh crore, while GST collection would be deficit by ₹85,000 crore a year, thus creating a policy trade-off.
• The reduction in GST on basic goods, modestly priced household items, and some services will be a relief in terms of daily expenses for the middle-income group.

Budget Measures for the Middle Class

Personal income slabs were restructured for the 2025–26 Budget, and the limits for rebates were raised; all these measures were intended to raise disposable income and thus increase demand for goods and services. The government was prepared to lose around ₹1 lakh crore in revenue from these reforms. The plan was also to bring more taxpayers into the fold of the simplified scheme; hence, the idea of higher compliance and broader participation in the formal tax system would be considered — this was the structural objective of the policy.

Equity, Progressivity, and Perceptions of Fairness

Who Truly Bears the Burden?

Although media and public discussions often assert that the “middle class” bears too much of the tax burden, the actual data paint a more complex picture:

• The number of Indian adults who directly pay income tax is very low, but the tax payments made by those who do are considerable and unequal.
• An investigation into the GST burden has revealed that middle-income urban families and the bottom 50% of income earners have almost the same share of indirect tax responsibilities.

Nevertheless, the role of indirect taxes on consumption implies that even the non-direct income-taxpayers lose a part of their income through GST, which devalues their buying power, thereby cutting down their living standard to a great extent.

Regressivity Concerns

Consumption taxes (like GST) are considered by many as very regressive taxes because they take away a larger percentage of income from low and moderate-income earners than high-income groups, especially if the exemptions are not liberalised.

The feature of India’s tax structure causes the middle-income families to suffer most from the indirect taxes, as a larger part of their income has to be used for the purchase of goods and services that are taxed.

Potential Risks to Urban Consumption and Growth

Slowdown in Spending

When disposable income is constrained by tax outlays and living costs, households tend to cut back on non-essential consumption. Evidence from post-pandemic consumer patterns shows shifts toward essential spending in India.

Insufficient Tax Base and Sustainability

India’s tax base remains narrow, with only a small fraction paying income tax, which limits redistribution and welfare spending without excessive reliance on indirect taxes.

Inflation and Tax Interactions

With rising prices on essentials like food and energy, indirect tax revenues simultaneously grow while eroding real consumption levels, further squeezing household budgets.

Conclusion

In recent times, the government of India has been making a lot of changes that they’re encouraging the middle-class and also trying to boost demand, changing the personal tax exemptions policy and simplifying GST, for example.

According to early data, it looks like the new reforms will lead to more disposable income and hence more consumption. But there are concerns about the structure that still exist:

• Due to the very limited number of people who pay direct taxes, it seems that the pressure is still on them more than on others.
• Indirect taxes that are applied uniformly could lead to the lower and middle classes losing their purchasing power.
• The situation of taxes imposed on people is worsened by very slow wage hikes and increasing costs of living.

The task ahead for the policy-makers is to make the tax system of India fair so that it does not hinder consumption, and at the same time be able to cater to the needs of public investment in the areas of infrastructure, education, and health, which are all responsible for the long-term economic growth.

The government would need to implement smart, balanced policies that promote tax progressivity, broaden the tax base, and reinforce India’s consumption to keep urban middle-class households as a major driver of India’s growth and at the same time, not have a tax burden on them that they cannot cope with.

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