The theme of providing choices to consumers, of products and services, has been happening across the globe. We think this choice is now being made available to Indian taxpayers as well, as per the proposed provisions of the Budget for FY 20-21.
Taxpayers in India will now have a choice to decide on how they wish to deal with the payment of their income taxes. Should they opt for the newly introduced tax regime which attracts lower rate of taxes as per new slabs, provided they forgo exemptions and deductions and pay lesser taxes, or should they stick to the older regime, avail exemptions and maybe pay higher taxes as a result?
Decision-making may get complicated, especially in the mind of the taxpayer. For example, consider a salaried individual who may have been paying her life insurance premium for many years with the comfort of also deriving some tax benefits under Section 80C. What this regular payment of insurance premiums was doing for her, was that it was absolving her of the herculean task of choosing and deciding on whether to save or spend this money. Paying premiums was a given in her mind, as the tax benefits associated with it were available. Now, this individual is faced with a paradox – should she go for the new tax regime and save tax by continuing the payment or should she spend the money instead, right away?
To my mind, considering the nature of Indian demographics, staying focussed on saving taxes is a good idea at this point, even though the government may be hoping that you consume more. If you opt for the new option, whereby you stop making those investments that qualify for tax exemptions and tax benefits such as those under Chapter VI-A and Sec 80C – PPF, LIC, ELSS, EPF – and those under Sec 24, i.e., interest on housing loans, and opt for a lower tax bracket, this choice may seem like a good one in the short term, but may be challenging to deal with in the long term.
Ultimately, whether this choice turns out be better or not, will be paradoxically known only many years later when there may be no savings done in early working years, as the absence of tax benefits made this individual move away from her saving habit. Given the fact that this new tax paying option nudges lakhs of individuals to spend and consume today, the move may work well for the economy for now, but the future may be different for the same individuals. Unless of course, by that time, India does have some government-backed social security system, which is absent today.
Businesses may feel the pinch
The future of many business such as insurance and housing may also be hurt as taxpayers may question whether they should continue with their insurance policies and may also contemplate what they will do servicing high home loan EMIs if the tax benefit on them does not exist.
There are other choices that this budget throws up as well – should one exit equities as the growth
slowdown concerns do not seem to have been addressed to a great extent, or stay invested as the benefits of a corporate tax rate cut tend to take time to play out in the economy? Will interest rates go up due to higher inflation and thus should one go ahead and prepay loans, or will interest rates actually come down due to the RBI rate cuts over the last twelve months that are yet to be transmitted to borrowers?
As Barry Schwartz wrote in his book The Paradox of Choice: Why More is Less, ‘Autonomy and Freedom of choice are critical to our wellbeing, and choice is critical to freedom and autonomy. Nonetheless, as individuals having more freedom and autonomy, we don't seem to be benefiting from it psychologically.’ For now, staying focussed on your family household budget is the choice that you should be making, rather than dwelling on the Indian government’s budget.(The writer is a Certified Financial Planner and the Founder of Plan Ahead Wealth Advisors)