Increasing the income tax exemption limit is expected to increase the sales of two-wheelers and passenger vehicles

According to a report drawn up by global brokerage group Jefferies, a rise in the level of income tax exemption to Rs 12 lakh will boost demand for two-wheelers and cars for passengers. In its report, it is stated that the proposed relief in taxes will have a cumulative gain of about Rs 1 lakh crore for India's middle-class citizens, and could generate enhanced discretionary consumption, including cars.

Jefferies estimates that the tax benefits will benefit about 3.5 crore taxpayers and will lead to an average annual benefit of about Rs 30 thousand per person. The report said that given the estimated market size of 43 lakh passenger vehicles and 2.1 crore two-wheelers in FY 2024-25, tax cuts could lead to additional spending. The report also said that the upcoming salary hike for government sector employees in FY 2026-27 could give an additional boost to the auto sector. The central government has recently announced the formation of the Eighth Pay Commission to recommend a hike in the salaries of central government employees.

The report estimates that two-wheelers and passenger vehicles will be among the biggest beneficiaries of increased consumer spending. The report has retained the estimate of a 13 percent compound annual growth rate (CAGR) for the two-wheeler industry from FY 2024-25 to FY 2026-27. Notably, while the two-wheeler and passenger vehicle segments are expected to grow strongly, the outlook for the truck industry is less optimistic. The report believes that slow capital expenditure (capex) growth could hurt truck demand.

While presenting India's 2025-2026 Union Budget, India's Finance Minister Nirmala Sitharaman addressed reducing the price of electric cars. With it, a conversation about reducing taxes for lithium-ion batteries ensued as well. This will then drive sales of electric cars in India subsequently.