Ringing in the new – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/editorial/ringing-in-the-new/article66463726.ece

The new tax regime offers flexibility to taxpayers

The not-so-gentle push towards the new income tax regime is benefitial for the long term | Photo Credit: SUSHIL KUMAR VERMA

Budget 2023-24 shows that the government, far from giving up on the idea of a new income tax regime because of poor adoption, plans to pull out all stops to popularise it. All personal tax concessions have been offered only to those opting for the new regime — the increase in the tax-exempt income from ₹5 lakh to ₹7 lakh, wider slabs and reduction in peak tax rates. Standard deduction will now apply to the new regime as it does to the old.

From now on, instead of the taxpayer opting into the new system, the new one will be the default option. Several tax loopholes used by affluent investors have also been plugged — whether it was buying high-value insurance plans for income or buying property beyond ₹10 crore to save on capital gains tax. This fairly forceful nudge to shift the taxpayer to the new system has met with criticism from both the economic commentariat and financial firms. But the new tax regime needs to be whole-heartedly welcomed in the interests of the taxpayer.

One of the chief criticisms of the new system is that, by doing away with the exemptions for Employees Provident Fund, Public Provident Fund, small savings schemes, insurance premia, home loan repayments et al, it disincentivises citizens from saving towards their future. But the truth is that, by providing a restrictive list of instruments and capping them, the old regime effectively let the government decide on behalf of the individual how much and in what instruments she must save. 80C tax breaks unnecessarily nudge young citizens with an equity appetite to max out their savings in guaranteed retirement vehicles. Seniors bet on unsuitable equity-linked mutual funds. Those with limited borrowing capacity over-extend themselves on home loans for tax sops. Small savings schemes are used more by the affluent than by the marginalised. Doing away with tax sops and allowing every individual to make her savings choices based on personal goals and risk appetite is a much better system. Such flexibility is also in keeping with India’s changing demographic, where the young prefer higher take-home pay without statute-driven deductions. The old regime also prompts financial firms to design and market their products on the strength of tax breaks, rather than on their merits. The life insurance industry’s lament on this Budget ‘killing’ the sector, demonstrates the extent to which insurance products have been mis-sold as investments instead of the protection instruments that they are.

Having nudged citizens towards the new regime though, the government must take further steps to ensure that it is effective. For the individual taxpayer to plan her long-term finances, she needs stability in policy which means that subsequent governments must continue with the new exemption-free regime. Where the Centre does want to harness public savings for a specific purpose or offer a better deal to special groups of savers (such as senior citizens, women or differently abled), it can offer higher or tax-free returns to woo them.  

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