Save/spend for social security absent in new tax regime

Incentive to invest for social security absent in new tax regime

Bring parity on tax incentives in interest earned on deposits vis-a-vis gains made in alternate investments: SBI Economic Research Department has suggested that the interest income on demand and time deposits made in the banks by the individuals should be given tax parity vis a vis the income that is available on the short term/long term gains made in equity and mutual funds*.  It further says that the household net financial savings, which is on the decline now, is likely go up by bringing parity and will also help the banks to grow their deposits especially CASA. 

Tax Exemptions absent in the new tax regime: Incidentally, the old tax regime permitted up to Rs.50,000 deduction from the taxable income for senior citizens on interest income earned  on deposits, while allowing up to Rs.10,000 in respect of savings deposits for others. This is not available in the new tax regime. In fact, the exemptions that were brought over a period of time like investing in specific deposits schemes on a long term basis, interest paid on loans taken for housing purposes, health Insurance premium paid for self, spouse and parents, deductions for disability, 50/100% relief towards donations made to eligible NGOs/funds of PM/CM,0etc. are also not available in the new tax regime. 

Present slabs in both favour to opt for new tax regime: More over the new tax slabs are designed in such a way so as to discourage individuals from filing the tax return under the old regime. For example, my total income on account of pension and interest income on deposits is now above 12 lacs. I invest Rs.1,50,000 either under NSC or Bank deposits, Rs.50000 as standard deduction from salary, Rs.50,000 under health insurance and Rs.50,000 towards interest on deposits. Suppose my income is Rs.14 lacs, the tax under the old regime is Rs.1,40,000, while it works out to Rs.1,20,000 under the new regime. (Please see the chart below)

The question naturally comes as to why should I bother about the old scheme and invest so much, when I need to pay  less tax under the new scheme without investing. Not only for my income level, the new regime tax is beneficial at least up to Rs.25 lakhs, unless one avails all tax exemptions in excess of Rs. 5 lacs. Even when one invests more in exempted schemes,  the difference in savings on tax under the old scheme is only a few thousands of rupees. Some examples (without taking into account the tax cess of 4%) are given below. 

Salaried individuals
Old tax Regime				New Tax Regime
Total Income	Exemptions	Taxable Income	Tax	Total Income	Exemptions	Taxable Income	Tax
(Amount in lacs)
14.00	3.00	11.00	1.40	14.00	0.50	13.50	1.20
7.50	2.50	5.00	nil	7.50	0.50	7.00	nil
9.00	2.50	6.50	0.40	9.00	0.50	8.50	0.40
12.00	2.50	9.50	1.00	12.00	0.50	11.50	0.83
15.00	3.00	12.00	1.70	15.00	0.50	14.50	1.40
20.00	3.00	17.00	3.20	20.00	0.50	19.50	2.85
25.00	3.00	22.00	4.70	25.00	0.50	24.50	4.35

(It was assumed that an individual with total income ranging from Rs.7.50 lacs to Rs.12 lacs might save up to Rs.2.50 lacs ((150,000 towards investing in NSC/bank deposit/interest paid on home loans plus Rs.50000 as standard deduction and Rs.50,000 as premium on health insurance/interest earned on deposits by senior citizens)). Rs.3 lacs assumed in respect of high earning individuals by adding Rs.50,000 insurance premium for parents also)

Is the move to separate tax from savings/spends justified? The new tax regime, no doubt, is simple and helps an individual to keep more cash in hand, with the increases in rates of tax being gradual up to Rs.15 lacs. While one appreciate the sincerity of the FM to ensure the success of the new tax regime, the old tax regime exemptions were introduced with a view to promote  orderly savings/expenditure in schemes that were of long term benefit to the individual concerned/society. 

Rationale of introducing the following schemes under the old tax regime:

1. Deduction of Rs.150,000 made in eligible deposit schemes was introduced to develop the savings habit of individuals, who were first time tax payers or earn income marginally higher than the income exempt from tax. Post Office NSCs were the most opted scheme in those days. This enabled the government to pool the resources from the small investors Pan India. Later on it was extended to bank deposits of equivalent  amount and tenure that enabled banks to canvass more resources with the same rate of interest offered on other deposits offered for the same period. The intention of the government to promote savings habits of the people in safe avenues, guaranteeing social security to fall back, got diluted by extending the scheme to investments made in equity linked savings schemes in order to promote stock market.

2. In order to promote savings deposits across the country, deduction of up to Rs.10,000 was introduced on interest earned on such deposits. This enabled the tax payer to improve his post tax return in savings deposits and served as an encouragement to keep idle funds in deposits, which are liquid and can be withdrawn at any point of time.

3. More than 95% of the senior citizens are devoid of regular income, like pension, post retirement. They depend on the interest income on deposits made from their superannuation benefits. The move to permit a deduction of Rs.50,000 from the interest income on deposits of senior citizens was a recognition to the living conditions of a majority of senior citizens.

4. As the government promoted life insurance and general insurance companies are in vogue for more than 50 years, the penetration level of insurance for life and general insurance for motors/plants are better in comparison to the number of people covered under accidental or health insurance. As the health insurance guarantees social security for those afflicted with illnesses/diseases necessitating hospitalization/periodic health check ups, deduction towards premium paid on health insurance for self/spouse/parents was made available. (Up to Rs.50,000 each for covering self/spouse and covering parents)

5. Affordable homes is a big initiative of the central government in the last 10 years. The interest on home loans exempted from arriving at taxable income, which was Rs.1.50 lacs for a long period of time, was enhanced to Rs.2 lacs in the recent past. The contribution of this exemption to the home loan portfolio growth in the banking system in the last three decades is huge.

6. Accumulated small drops converge into a Ocean. The donations to PM/CM Relief Funds get 100% tax exemption and donations made to various eligible charities are eligible for a 50% relief, with certain ceiling prevailing on the total donations eligible for exemption. This served as an incentive to innumerable individuals to contribute in large measure to the welfare schemes promoted by the said government sponsored relief funds/private charities.

Just a thought to ponder: With more people likely to join the new tax regime, year after year, the pace of accretion to the above investments/ spending are likely to come down. Even if the government is of the firm view that the tax payable is to be differentiated from savings/investment/social security-charity spending, the importance of growing the funds for the above  well intended purposeful needs no further emphasis. The question is how the government will encourage the public to keep focused on the above areas, with the excess cash available in their hands due to the reduced tax-slabs in the new tax regime?

Regards

V.Viswanathan

16th July 2024

*15% is the tax on short term gain and 10% is the tax on long term gain, if the income is more than one lakh irrespective of the tax lab to which the individual belong.