A growth push, and a nudge to salaried class

The finance minister has done well to stick to the path of fiscal consolidation, but whether people will move to new default tax regime will depend on some factors

It has been clear for some time that the 2023-24 Union Budget was not going to be a pre-election exercise. The fiscal consolidation that was hard fought over the past few years was not going to be flung away for some imagined gains at the poll hustings. True to form, the Union finance minister has managed to pull off a rare feat — of pushing the pedal on capital spends, reining in the fiscal deficit to 5.9% of the Gross Domestic Product (GDP) for fiscal year (FY) 24, yet creating a buzz among the salaried class about a potentially viable lower tax regime.

The 7.5% interest rate, given in the one-time small savings scheme aimed at women — the Mahila Samman Savings Certificate – with a limit of ₹2 lakh for two years, is meant to incentivise the move to the formal financial sector for women who are still wary of banks, typically in small towns and rural India (REUTERS)

The budget has continued with the growth push, hiking the capital spending to ₹10 lakh crore, 3.3% of GDP. Each rupee of capex translates to about ₹3 in a ripple effect in the economy. A bulk of this money is directed at long-term infra projects whose payback comes after a lag. Add this to a wide range of reform measures and the 50 basis points that digitisation-driven efficiency is likely to add to GDP, and the Indian economy seems primed for growth in the next decade. At a nominal growth rate of 12%, India will hit the $10-trillion mark as early as FY2032, becoming one of the top three global economic powers.

For the Indian salaried class, which contributes 15% of the total budget in direct taxes, there is a nudge to move to the new tax regime. It is now the default, so if you want to stay with the old regime, you will need to opt in. The old regime had a web of exemptions, deductions and rebates; the new regime introduced in 2020-21 has a lower tax rate, but only if some of the deductions are not availed. The finance minister has reduced the six earlier slabs in the new regime to five, which is a sliding scale from zero to 39% post surcharge and cess. People in the income tax slab of zero to ₹3 lakh a year pay no tax and those between ₹15 lakh to ₹50 lakh pay an effective 31.2% income tax.

Those who earn over ₹50 lakh a year will pay a surcharge of 10%, but the highest surcharge level has been brought down from 37% to 25%. Therefore, for people making ₹5 crore and above a year, the highest marginal tax rate is now 39%, down from 42.7%.

Compare this to what a company pays after opting for the new tax regime applicable to it, and it still feels unfair. The marginal rate for such a firm is 25.17%, making Indian tax rates comparable to China, the United States and France. Individuals have nowhere to run, and so, the higher taxes on the rich could continue for a few more years.

Should you migrate to the new tax regime? The answer is, it depends. For most cases, those who earn up to ₹15 lakh a year stand to benefit with lower rates in the new tax regime. For example, many young gig workers are not part of the salaried and organised workforce with benefits such as house rent allowance and provident fund. So, they will find it easier to move to the new tax regime.

For older cohorts who might have finished paying off their home loans, that deduction no longer holds any meaning. At certain income levels, they might find it beneficial to move. However, for a mass migration of people to the new regime, the surcharge and rates will need to be further lowered, in comparison with the old regime.

For senior citizens who prefer assured return products, the benefits — the deposit limits on the Senior Citizen Saving Scheme and the Monthly Income Scheme — have been doubled. Someone above 60 years can now invest up to ₹39 lakh in government-guaranteed products. The 7.5% interest rate, given in the one-time small savings scheme aimed at women — the Mahila Samman Savings Certificate — with a limit of ₹2 lakh for two years, is meant to incentivise the move to the formal financial sector for women who are still wary of banks, typically in small towns and rural India. It will also help build a small financial asset pool in the name of women.

Though there is a very long road ahead, this budget marks the beginning of rationalisation across the tax treatment of financial products in a small way. All life insurance policies that have a premium of more than to ₹5 lakh a year now become EET (exempt, exempt, taxable) — that is, you get the Section 80C to ₹1.5 lakh benefit (in the old tax regime), income during the life of the policy is exempt, but on exit, you are taxed at a slab rate. This is a big nudge to the insurance industry to stop selling low-on-insurance cover, low-on-return and high-on-cost toxic products to the Indian middle class. This means investors will gain and insurance firms will lose — no wonder the stocks of life insurance companies fell as soon as they digested the information.

A move from physical gold to e-gold will not invite capital gains tax (20% with indexation if held for three years). This thought must be extended to investors who are rebalancing their portfolios within the same asset class in equity and debt as well. The benefit exists for real estate through the buying of a fresh property and through investing the profit in special bonds. Why should equity mutual fund investors, for example, have to pay a capital gains tax if they are moving from a poorly performing scheme to a better one?

The 1991 reforms created a giant wave that a cohort my age rode to better work, money and a life that was unimaginable growing up in the 1970s and 1980s. I see the same excitement in the starting-out cohorts today of the opportunity at home. Rather than a few tax-saving freebies, India’s young people are right to want growth and empowerment.

Monika Halan is adjunct professor at NISM and author of Let’s Talk Money The views expressed are personal