Budget 2025 expectations: Reforms to Boost Demand and Growth

India’s economy has demonstrated remarkable resilience, emerging as one of the fastest-growing major economies globally. However, the growth trajectory is showing signs of slowing, underscoring the urgent need to boost demand and accelerate economic expansion.

Experts project India’s economy to grow by 6.5% to 7% in the financial year ending March 2025, falling short of the RBI’s forecast of 7.2%. This marks a notable decline compared to the robust 8.2% growth recorded in FY23-24.

Despite global headwinds and domestic challenges, India’s economy has been supported by strong consumption trends and steady private investments. However, targeted reforms are needed to maintain this momentum and address slowing growth.

Sectors such as health insurance, taxation, and mutual funds are particularly hopeful for policy changes that could increase financial inclusion and channel savings into productive investments. With the Union Budget 2025 around the corner, the government has an opportunity to implement measures that not only stimulate demand but also align with the nation’s broader economic objectives.

Against this backdrop, various stakeholders are pinning their hopes on specific reforms that can address the immediate challenges and pave the way for sustained growth. Here are some key expectations from the government during this year’s union budget:

Reduction of GST on Health Insurance Policies

India has among the lowest health insurance cover among developing nations. One of the most pressing demands from the sector has been the reduction of GST rates on health insurance policies, which currently stand at 18%. High premiums deter many middle-class families from purchasing adequate health coverage. Lowering GST to 5% or 12% could significantly reduce the cost of premiums, making health insurance more accessible and driving higher penetration. Such a move would align with the government’s goal of universal health coverage under schemes like Ayushman Bharat.

Relief in Income Tax Slabs

Middle-class taxpayers are hoping for relief in income tax slabs, particularly for incomes up to ₹15 lakh. Currently, individuals earning between ₹7 lakh and ₹15 lakh are taxed at 20% or 30%, leaving little disposable income for savings and consumption. Rationalizing these slabs would put more money in the hands of consumers, spurring demand and boosting overall economic activity.

Alternatively, the government could focus on increasing the investment limit under Section 80C, which has remained static at ₹1.5 lakh for several years. Given inflationary pressures, raising this limit to ₹2.5 lakh could encourage higher investments in tax-saving instruments such as ELSS and life insurance policies.

Reinstatement of Indexation Benefits for Debt Mutual Funds

The removal of indexation benefits for debt mutual funds in 2023 significantly impacted the attractiveness of these investment instruments. Previously, long-term capital gains from debt funds were taxed at 20% with indexation, which adjusted the purchase price for inflation and reduced the taxable gains. With the removal of this benefit, gains from debt funds are now taxed at slab rates regardless of the holding period. This shift has eroded the tax efficiency that made debt mutual funds a preferred choice for long-term investors.
Reinstating indexation benefits would incentivize retail participation in debt funds, offering a more tax-efficient investment avenue and supporting the financialization of savings. 

Simplified Capital Gains Tax: Aligning Growth with Investor Confidence

The Union Budget 2025 presents an opportunity to simplify India’s capital gains tax structure, an approach that can enhance investor confidence and promote long-term wealth creation. The current framework, while effective in its broader objectives, can benefit from further clarity and uniformity to better serve the growing base of retail investors.

The Association of Mutual Funds in India (AMFI) has proposed a uniform Long-Term Capital Gains (LTCG) tax rate of 10% on gains exceeding ₹2 lakh for equity-oriented mutual funds held for one to three years. A straightforward and uniform tax regime could attract more retail investors to financial markets, helping them diversify their portfolios while contributing to the broader financialization of savings.

Incentives for Long-Term Investments

To encourage long-term wealth creation, the government could introduce additional tax benefits for equity mutual funds held beyond seven years. This could include reduced LTCG rates or higher exemption limits for long-term holdings. Such measures would align with the goal of fostering disciplined, long-term financial planning among retail investors. Enhanced incentives could also reduce market volatility by promoting stable, long-term capital inflows.

Incentives for Sustainable and Green Mutual Funds

India’s ambitious goal of achieving Net Zero emissions by 2070 requires substantial investments to transition to a sustainable and low-carbon economy. Tax breaks for ESG (Environmental, Social, and Governance) mutual funds can help mobilize domestic capital for green projects, aligning individual financial goals with the nation’s sustainability objectives. These incentives could also attract foreign investments in renewable energy and infrastructure, reinforcing India’s position as a leader in sustainable finance.

By focusing on areas such as financial inclusion, sustainable investing, and tax efficiency, the government can pave the way for a resilient economy. These measures will not only support immediate economic needs but also strengthen India's position as a global economic powerhouse for the future.

 The author is Vice President, Product Management, Mutual Funds, INDmoney