The tax gambit

Context:

• The hike in tax-free ceiling under the new income-tax system to ?7 lakh from ?5 lakh will lower tax rates for those who give up existing tax exemptions. 

Concerns on tax move:

• Effect on middle-class: The effect on savings pattern can bring difficulties for middle-class as they do not save enough to avail the tax exemptions and end up paying higher rates.
• Lack of social security: There is varying arithmetic to determine at what levels of income and savings taxpayers should consider switching to the new “default” regime.
• Drop in Investments: The savings rate may hit investments and would affect lower income earners.

Policy without consideration:

• Of adequate financial literacy: India’s literacy and financial literacy levels mean many taxpayers cannot deem the right mix of consumption and savings, leave alone directing savings into an appropriate medley of safe as well as inflation-beating investments.
• Youth amongst 7 lakh slab: There comes most of the youth of the country under this regime of taxation and can impact the savings.
• Unaware of market regime: There is a demand-supply mismatch, which is difficult for a consumer to understand and accordingly invest.