Increase in disposable income from the revised income tax slab is expected to boost automotive sales, particularly in the entry-level segment.
01 Feb 2025 | 3999 Views | By Prerna Lidhoo
In the Budget 2025, Finance Minister Nirmala Sitharaman announced that individuals earning up to Rs 12 lakh annually—and up to Rs 12.75 lakh for salaried taxpayers factoring in the standard deduction of Rs 75,000—will be exempt from income tax under the new tax regime, subject to tax rebates.
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In the Budget 2025, Finance Minister Nirmala Sitharaman announced that individuals earning up to Rs 12 lakh annually—and up to Rs 12.75 lakh for salaried taxpayers factoring in the standard deduction of Rs 75,000—will be exempt from income tax under the new tax regime, subject to tax rebates.
In a major relief for middle-class taxpayers, the new tax structure will increase disposable income, encouraging higher household consumption, savings, and investment. The income tax relief is expected to provide a much-needed boost to automotive sales, particularly in the entry-level segment as middle-class households will have higher disposable income. This increase in purchasing power is likely to revive demand for budget-friendly cars priced under Rs 10 lakh, a segment that has been struggling for several quarters.
"The middle class provides strength to the economy. In recognition of their contribution, we have periodically reduced the tax burdens. I am now happy to announce that there will be no income tax up to an income of Rs 12 lakh," Sitharaman said while presenting the Union Budget 2025 in the Lok Sabha on Saturday.
Financial experts estimate that approximately Rs 1 lakh crore will be released through direct tax reductions and income tax relief measures. There will be individual savings of upto Rs 80,000 under the new regime, which is expected to drive short-term demand, particularly benefiting companies such as Maruti Suzuki, Hero MotoCorp, and Hyundai Motor, which have a strong presence in the entry-level segment. Over the past few years, demand for hatchbacks and budget-friendly two-wheelers—particularly motorcycles under 150cc—has declined due to rising vehicle costs, higher fuel prices, and changing consumer preferences.
As consumers feel more financially secure, they may be more inclined to make discretionary purchases, including entry-level cars, two-wheelers, and compact SUVs. Additionally, improved household savings and investment capacity could lead to better access to financing options, further encouraging vehicle purchases.
“Tax relief will have a positive impact on the entry-level buyer as it gives more disposable income. For example, the amount that an individual saves in the new regime will make for the downpayment for an entry-level car or a bike. Even for used-cars, it will have a positive impact. All two-wheeler stocks and car companies with products less than Rs 6-7 lakhs will benefit from the income tax cut. Kavan Mukhtyar, Partner and Leader - Automotive, PwC India
According to Hemal N Thakkar, Senior Practice Leader & Director at CRISIL, leaving more money in the hands of people and favourable structural measures on the farm front will add momentum to sectors such as two-wheelers and consumer durables. "The consequent increase in the consumption of low-ticket discretionary items will boost capacity utilisation in relevant indusries and will be supportive of private sector capex," he adds.
Experts say this could play a crucial role in reversing the slowdown in urban automotive sales and supporting broader economic growth. With household budgets having more flexibility, it is expected to make it easier for consumers to consider big-ticket purchases like cars and two-wheelers. This could particularly benefit first-time buyers, many of whom have deferred purchases due to affordability concerns.
In 2018, hatchbacks made up 46% of the passenger car market, but by 2023, their share had declined to 30%. In contrast, SUVs have surged in popularity, capturing a 48.7% market share in the first half of FY2024, up from 41.5% in FY2023. A similar shift is evident in the two-wheeler segment—motorcycles with engine capacities under 150cc, which once dominated with over 60% of sales, now account for around 48%, as demand increasingly shifts toward premium models and scooters.
“By providing tax exemptions and customs duty reductions, the budget offers the right incentives for businesses to scale up and invest in India’s manufacturing sector, positioning it for long-term growth and global competitiveness,” Akshat Khetan, Founder, AU Corporate Advisory and Legal Services said.
According to Federation of Automobile Dealers Associations (FADA), the taxation reforms will boost consumer spending. "More middle-class families can now afford car upgrades. We expect a shift towards SUVs, sedans, and premium two-wheelers," FADA wrote in a note.