Welfare spending will rise, including on providing all households with piped water and health insurance for the poor, and the finance minister extended a scheme distributing free food grains to about 800 million struggling Indians.
Modi looks set to seek a third term as premier in a general election due before May 2024.
The loudest cheers in Sitharaman's near 90-minute speech to parliament came when she announced around $4.2 billion of direct tax incentives for the middle classes -- some of the most vocal supporters of Modi and his ruling right-wing Bharatiya Janata Party.
But only about 80 million people and companies pay direct taxes in India, despite its population of 1.4 billion.
The vast majority of people earn less than the income tax threshold, and tax under-reporting remains a major issue.
Despite the tax cuts, Sitharaman said India's budget deficit would be reduced from 6.4 percent of GDP to 5.9 per cent.
Finance secretary TV Somanathan told newspersons the government's expectations were based on growth projections and an increased total tax take.
New Delhi's deficit and growth targets were hit after Covid-19 restrictions in 2020 but the country has since recovered to become the world's fastest-growing major economy.
The International Monetary Fund last week projected India would grow 6.1 per cent this year.