The new income tax scheme will not impact savings adversely
The union budget presented for the next financial year has provided the necessary incentive for taxpayers to switch over to the new income tax scheme. Individual taxpayers are free to choose the old scheme or the new scheme at his/her convenience. It is also possible for one to change from one scheme to another in the coming years any number of times. Hence all our freedom has been given to the individual taxpayers and there is no restrictive clause on this.
However as one can claim various deductions only if he opts for the old scheme, there are criticisms in the public domain and most of these are unsubstantiated. One such criticism is that as there is a higher basic exemption limit under the new scheme, people will opt for the new scheme only and the new scheme discourages savings of people and hence there will be a reduction in savings .
Types of deductions under the old scheme
Under the old scheme, deductions are allowed under various categories. We can broadly classify them under the following: Deductions for savings (investments), Deductions for some expenses and Deductions for repayment of the loan. Deductions for savings are allowed for investments like Public Provident Fund, Employees PF, Equity Linked Savings Scheme, National Savings Certificate, Life Insurance premium, Senior Citizen Savings Scheme etc. Deductions for some expenses like Tuition fees, Medical Insurance premiums, Interest on Housing loans etc. are allowed.
Effect of the new scheme on savings
When people switch over to a new scheme, as they cannot claim any deductions, naturally there is no compulsion for them to save and invest in permissible instruments. But they will continue with the loan repayments and also continue with the payment of tuition fees etc. as these are their obligations. Let us see how different savings schemes will be impacted.
Life Insurance
Ideally, life insurance schemes should be for coverage of risk. However, for many decades, LIC of India was selling insurance as a savings product by selling more endowment policies. Life insurance companies have not popularized term insurance policies which are pure insurance products. Now when people switch over to the new income tax scheme, the insurance companies will be hit.
Equity Linked Savings Scheme
This is another popular saving product under income tax exemption. The average Asset Under Management (AAUM) of this scheme for Jan 2023 is Rs.6065.05 crores whereas the total mutual fund AAUM for Jan 2023 is Rs.333387.72 crores. This is hardly 1.81 per cent of AAUM. So the impact on the Mutual Fund industry may be negligible. Even now, as the scheme is with a lock-in period of 3 years, people rotate investments by redemption of old investments and making a new investment, without actually pumping in the new outflow.
Public Provident Fund
This is another popular long-term scheme used for tax-saving purposes by individuals. Here again, people try to rotate investments, as partial withdrawal and loan facilities are available. For the year 2021-22, this scheme has net addition of only Rs.12846 crores
Other Small Savings Schemes
Sukanya Smriddhi Yojana, National Savings Certificate and Senior Citizen Savings Scheme are some of the other schemes under the Small Savings Scheme which provide deductions under Income Tax. As per a report by the Bank of Baroda released last year, in February 2022 Small Saving Deposits stood at Rs.9.9 trillion, which is only a small fraction of Scheduled Commercial Banks deposits that totalled Rs.170.2 trillion.
The new tax scheme is based on the principle of fewer exemptions and lower rates. The new scheme allows a larger sum of money into the hands of taxpayers and permits them to decide the investment best suitable for them.
(The author is a retired banker)
