Budget 2023: Ending tax deduction to hit personal savings

Through the changes in tax slabs and rebates under the ‘new tax regime’ the government has made its intention clear to do away with tax deductions and exemptions, which have played a crucial role in promoting savings in financial instruments like provident funds, pension and insurance schemes, a key safety net for majority of the middle-class.  

In the Budget 2023, Finance Minister Nirmala Sitharaman proposed to make the ‘new tax regime’ the default regime. While the government has offered relief to taxpayers by increasing basic exemptions and rebates under the 'new tax regime' no such relief has been offered to the people who choose to stick to the old system.

“In this hullabaloo about OTR (old tax regime) and NTR (new tax regime), the importance of personal savings in a developing country has been jettisoned,” said former finance minister P Chidambaram.  

“In the absence of a state-provided safety net for the vast majority of people, personal savings is the only social security,” Chidambaram said in a tweet.

In the absence of a State-provided safety net for the vast majority of people, personal savings is the only social security

— P. Chidambaram (@PChidambaram_IN) February 2, 2023

The rationale offered for promoting the new tax regime is that it is simpler and offers flexibility to the taxpayer to invest their money as they prefer. “When the rate is low and you save money, it is your choice where you want to invest it,” finance minister Sitharaman said in an interview with Doordarshan after presentation of the budget on Wednesday. 

Also Read | New tax regime 'sweetened' to benefit maximum number of taxpayers: CBDT Chairman

No doubt, the new tax regime offers flexibility. Deductions offered under Section 80C and other relevant sections of the Income Tax Act have played a crucially important role in promoting investments in financial products like mutual funds, ELSS, insurance premium etc. Doing away with deductions and other tax incentives would reduce people’s, especially youngsters’ willingness to invest in long-term financial products and spur expenditure.

According to C J George, MD and CEO of Geojit Financial Services, the new tax regime that seeks to do away with deductions will impact the individuals and the economy two ways – one being the incentive to save and the other more importantly directing savings into future appropriate avenues like health insurance, life insurance, pension products etc, which are extremely important for social security at large.

“Generally speaking this overall approach is likely to fail in directing scarce resources into the channels that are important for individuals, families, corporates and the country as a whole although it is simple and straight,” George told DH.

Savings, especially in long-term instruments like ELSS, NPS, PPF and Mutual Funds, are perhaps the biggest safety net for the middle-class in India. The tax sops offered under the new tax regime is likely to induce expenditure, which is positive for the economy. However, will it be good for the financial security of the middle-class is a moot point.