The Tax Gambit

Context:  Much ink has been spilled by now on the Budget’s hike in the tax-free ceiling under the new income tax system introduced in 2020, to ₹7 lakh from ₹5 lakh, with lower tax rates for those who give up existing tax exemptions. Experts Concerns on take away of the old tax regime:

• Exemptions “give some social security to the middle class” altogether will be affected.
• May affect the savings rate and hit investments.
• Lower income earners do not save enough to avail the tax-exemptions and end up paying higher rates.
• India’s literacy and financial literacy levels mean many taxpayers cannot deem the right mix of consumption and savings.
• Inflation beating investments.

Why is the old tax regime required? The old exemption-based regime helps guide families towards some level of prudent asset allocation to cope with life’s uncertainties, with a leg-up for building a critical asset over their working lives — a roof over their head. Conclusion: The nudge away from the old tax regime must be accompanied by greater financial literacy efforts from the government and regulators and a crackdown on unethical selling practices that could lead to people ending up in penury. Source: The Hindu