India’s net direct tax collections reached a remarkable Rs 22.26 lakh crore in FY 2024–25, representing a robust 13.57% year-on-year growth compared to Rs 19.6 lakh crore in FY24. These collections are just shy of the revised budget estimate (RE) of Rs 22.37 lakh crore, indicating strong tax compliance, higher taxpayer incomes, and improving corporate profitability.

Consistent growth in direct taxes

Over the last few years, India’s direct tax collections have shown consistent and healthy growth. From Rs 14.08 lakh crore in FY22 to Rs 22.26 lakh crore in FY25, net collections have grown at a compound annual growth rate (CAGR) of 16.5%, outpacing the rate of nominal GDP growth.

The corporate tax (CT) component of these collections increased from Rs 7.12 lakh crore in FY22 to Rs 9.8 lakh crore in FY25, recording a CAGR of 11.2%, despite a lower CT rate of 21% plus surcharges. On the other hand, non-corporate tax collections—mainly income taxes—nearly doubled, rising from Rs 6.96 lakh crore in FY22 to Rs 12.57 lakh crore in FY25, a CAGR of 21.8%. This implies a deepening of the taxpayer base and significant improvement in tax buoyancy.

Corporate profitability remains strong

Corporate profitability remains a critical driver of India’s tax story. In FY24, India collected Rs 11.32 lakh crore in gross corporate tax. Assuming a 25% effective tax rate, this equates to Rs 45 lakh crore in pre-tax corporate profits, translating to 15% of the GDP of Rs 301 lakh crore.

In FY25, with gross corporate tax collections at Rs 12.72 lakh crore, pre-tax profits are estimated to be Rs 50.8 lakh crore, or 15.37% of the estimated GDP of Rs 331 lakh crore. This 15%+ profit-to-GDP ratio in two consecutive years challenges concerns of weakening profitability and reflects robust performance across industries.

The lower corporate tax rate has aided companies in improving their cash flows, resulting in greater debt repayments and capital expenditure (CapEx) from internal resources. This financial strength is particularly evident in the banking sector, which has used these cash flows to strengthen capital and reduce the cost of lending across the economy.

Gross tax collections and refunds

Gross direct tax collections (corporate + non-corporate) surged to Rs 27.02 lakh crore in FY25, up from Rs 23.38 lakh crore in FY24—an increase of 15.59%, again surpassing the estimated nominal GDP growth of 9.9%. This reaffirms tax buoyancy and an increasingly formal economy.

Interestingly, tax refunds have also increased sharply—rising from Rs 3.78 lakh crore in FY24 to Rs 4.76 lakh crore in FY25, growing by 26.04%. Refunds constituted 17.6% of gross collections, compared to 16.2% in the previous year. This high percentage—amounting to Rs 8.55 lakh crore cumulatively over two years—suggests a backlog clearance and resolution of disputed taxes in FY25.

This also explains why, even though some Rs 1 lakh crore of non-CT taxes were reduced in the Budget FY26 (via tax relief to individuals), the target of Rs 25.2 lakh crore in direct taxes for FY26 could still be achievable if refunds fall and the backlog is fully cleared.

Tax-to-GDP ratio improving

India’s net direct tax-to-GDP ratio has improved from 6.5% in FY24 to 6.7% in FY25, while the gross direct tax-to-GDP ratio rose from 7.76% to 8.16%. These figures underscore gains in tax efficiency and improved economic formalization.

When comparing India to developed economies like the United States, the progress is striking. In the US, direct taxes (including corporate and income tax) were 10.5% of GDP in CY23 after excluding payroll taxes (6% of GDP) which are used for social security—a mechanism not present in India.

By contrast, India’s gross direct tax-to-GDP ratio at 8.16% is a solid performance for a developing economy with a per capita income of $2,700, versus $95,000 in the US. Moreover, corporate tax collections in India at 3% of GDP are twice the US level of 1.5%—an unexpected and pleasant surprise for policymakers and analysts alike.

Compliance, technology, and reform

India’s improved tax performance is attributed to a mix of:

• Better compliance mechanisms,

• Wider use of technology,

• Higher corporate earnings, and

• Steady increase in taxpayer incomes.

With over Rs 13.36 lakh crore still locked in tax litigation, addressing disputes is critical to further strengthen India’s fiscal foundation. The Ministry of Finance must also focus on:

• Simplifying tax rules,

• Enhancing dispute resolution frameworks, and

• Eliminating tax-related harassment, often dubbed as tax terrorism.

FY26 targets and outlook

The Budget FY26 pegs direct tax collections at Rs 25.2 lakh crore, a 13.2% increase over FY25. This goal appears achievable if current trends continue, especially as:

• Refunds normalize after backlog clearance,

• Disputed cases are settled or ruled in favor of the taxpayer, and

• Taxpayer compliance and corporate profitability remain strong.

If India maintains this high tax buoyancy, it can afford lower borrowing, reduce its fiscal deficit, and redirect revenues towards infrastructure, healthcare, and education.

Conclusion

The data from FY25 reaffirms that India’s economy is on solid footing. With direct tax growth consistently exceeding nominal GDP, the nation is gradually moving towards a more equitable and efficient tax system. This not only strengthens fiscal health but also creates room for targeted welfare and investment spending.

By continuing to invest in tax administration reforms, resolving legacy disputes, and maintaining stable tax policies, India is on track to realize its vision of a $5 trillion economy.

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The Current active IPO are Dar Credit and Capital, Belrise Industries, Borana Weaves.