The tax gambit – Government should not stop nudging people towards safe, long-term savings

Source: The post is based on the article “The tax gambit – Government should not stop nudging people towards safe, long-term savings” published in The Hindu on 6th February 2023.

Syllabus: GS 3 – Government Budgeting.

Relevance: About new income tax system.

News: During the budget speech, the government introduced the new income tax system.

What is the new income tax system?

The new system was based on the thought that the individual is the best judge of his/her income.

What are the advantages of the new income tax system?

Why new income tax system’s idea of the individual is the best judge of his/her income is flawed?

Though, the statement is individually valid the lower income earners will not benefit a lot from the system. This is because, a) Lower income earners do not save enough to avail of the tax exemptions and end up paying higher rates, b) India’s low literacy and financial literacy levels will make taxpayers’ mix of consumption and savings complicated, c) Adult humans do not behave as rationally as economists and invest in inflation-beating investments, d) Financial products are routinely mis-sold to those not equipped to understand market nuances and the risks embedded, e) India’s retail participation in stocks may have risen in recent years, but not everyone can handle the risks of equity markets or avoid being tricked by influencer-operators.

Above all, there are no universal social security and health benefits in India. The old exemption-based regime helps guide families towards some level of prudent asset allocation to cope with life’s uncertainties.

What should be done to make the new income tax system comprehensive?

Before taking away the old tax regime the government must ensure adequate financial literacy efforts and crack down on unethical selling practices of stocks, insurance and other financial products. Further, if such a state is achieved then the government should revisit the idea of mandatory contributions to provident funds and pensions.