"The Government has raised the exemption limit for the payment of Income tax from Rs. 2 lakh to Rs. 2.5 lakh." If the situation of deficient demand is prevailing in the economy, what will be the impact of this action taken by the Government ?

Question

Accepted Answer

Raising the income tax exemption limit from ₹2 lakh to ₹2.5 lakh **increases disposable income** of taxpayers. In a situation of **deficient demand**, this is beneficial because:

- Households have more disposable income to spend on consumption
- Higher consumption expenditure increases aggregate demand
- This helps to close the deflationary gap and boost output, income and employment

However, this measure also reduces government tax revenue, which may affect the government's fiscal position. The net impact depends on the magnitude of increase in consumption versus the reduction in government revenue.