The Union Budget 2025 introduced a significant revision to the income tax exemption limit, raising it to ₹12 lakh. This change has sparked expectations of increased consumer spending, particularly in sectors such as automobiles and fast-moving consumer goods. With more disposable income available to middle-class taxpayers, the automotive industry is poised to see shifts in demand, with varying effects across vehicle segments. Analysts believe that while this tax policy revision may drive overall consumer sentiment, the extent of its impact on auto sales remains uncertain.

Japanese brokerage firm Nomura has provided a cautious outlook on the automobile sector, suggesting that while the tax exemption increase could benefit the industry, the gains may not be substantial. A key factor is the preference among many taxpayers to stick with the old tax regime, which offers deductions that offset the benefits of the new exemption limits. According to Nomura, around 60% of tax filers in India do not pay income taxes, and among those who do, a significant proportion still prefers the old regime. This raises questions about the actual boost in discretionary spending resulting from the revised exemption limits.

One key observation is the divergence in vehicle demand across different income groups. Higher-income individuals, who are more likely to already own vehicles, stand to gain the most from the tax relief. As a result, premium segments such as SUVs and luxury cars are expected to see higher demand, while budget-friendly small cars may not experience a proportionate increase in sales. This potential shift in consumer preference is being closely monitored by automakers looking to adjust their production and marketing strategies accordingly.
 

Market Performance, Rural Demand, and Auto Stock Trends

Beyond urban centers, rural demand is expected to play a crucial role in shaping automobile sales in the coming year. The budget's focus on rural development initiatives, including the increase in the Kisan Credit Card limit, is likely to boost demand for personal vehicles, two-wheelers, and tractors. These factors have prompted analysts to revise their growth forecasts for the sector. Nomura projects moderate volume growth for the automobile sector in FY26, estimating a 6% increase in personal vehicle (PV) sales, 5% growth in medium and heavy commercial vehicles (MHCVs), 7% expansion in two-wheeler sales, and a 5% rise in tractor demand.

The strong performance of automakers in January 2025 further reinforces the significance of rural demand. Many leading companies reported healthy sales, with Maruti Suzuki posting a 6.5% year-on-year growth, largely supported by rural markets. Mahindra and Mahindra saw robust utility vehicle sales, benefiting from strong demand across both urban and rural segments. Two-wheeler manufacturers also fared well, with TVS Motor and Bajaj Auto reporting impressive growth in both domestic and export markets. Eicher Motors saw a notable 20% rise in its Volvo Eicher Commercial Vehicles (VECV) segment, reflecting steady demand in the commercial vehicle category.

In terms of stock market performance, Nomura has highlighted specific auto stocks as top picks for investors looking to capitalize on sector growth. Mahindra and Mahindra is a preferred choice, with a target price of ₹3,664, while TVS Motor has a target price of ₹2,689. The brokerage firm expects these companies to continue benefiting from evolving consumer trends and stable industry fundamentals. Meanwhile, the broader outlook for the automobile sector remains balanced, with steady growth expected in key vehicle segments despite global economic uncertainties.

As tax policy changes take effect, the real impact on auto sales will become clearer in the coming months. While consumer sentiment has improved following the exemption limit hike, its influence on large-scale purchases such as automobiles remains dependent on factors such as financing availability, inflation trends, and evolving consumer preferences. Automakers and investors alike will be closely tracking sales data and policy developments to assess the long-term effects of the Union Budget 2025 on India's automotive landscape.