Here's why deductions shouldn't be done away with in the new income tax regime

This isn’t a debate about letting people choose between the old income tax regime and the new one, as the finance minister would like to believe. This is a debate between do you want to nudge people to save more or not?

According to The Economic Times, over the years, the gross financial savings of Indian households have been range bound — around 9-10 percent of GDP. But net financial savings available for growth is falling. It fell from 7.2 percent of GDP in 2011-12 to 6.5 percent in 2017-18.

Clearly, households are borrowing more and lifestyle changes are afoot. There isn’t anything wrong with people making these choices. But in a country where children are seen as ‘retirement plans’ it becomes the duty of the government to force people to save. This budget takes a dangerous turn from that.

If anything, four major components; the house-rent allowance (HRA), tax deductions on certain investments, life and health insurance and rebate on interest for a house loan must not be taken away from income tax deductions.

These four, in the absence of any social security provided by the government, become the responsibility of the taxpayer themselves. According to this LiveMint report, more than half of Indians don’t have a health cover. And a majority of the rest have inadequate health insurance covers. In other words, most citizens opt for health insurance to take benefit of the income tax deductions rather than their actual needs. It is the same in case of investments. The fact that most of the salaried class rush to ‘invest’ in mutual funds, provident funds, et al between January and March 31, is a testament that the idea is to save on income tax rather than plan for the future.

In such a situation, the FM giving people the option to opt out of these deductions completely will wreak havoc on already feeble financial literacy in India. By the way of these deductions, at least people were forced to make some decisions around their future financial wellbeing.

With the option done away with, coupled with the absence of financial literacy programmes starting from school and the overall apathy of social security and post-retirement money needs, the new income tax regime is set to be a disaster for India’s future generations.

The Reserve Bank of India (RBI)’s committee on household finance in 2017 found only 23 percent people saving or planning to save for retirement in 2016. Less than 30 percent insurance policies make it to their sixth year. The report further stated, as late as 2031, the number of Indians over the age of 65 likely to be dependent on their children for their financial needs post retirement stood at over 50 percent. Simply put, even 11 years from now, more than half of India’s senior citizenry will have zero financial plans to sustain their retired life.

This is more pronounced when one looks at data at the lower economic strata. Nearly half of the workers from the unorganised sector failed to contribute the required Rs 1,000 over a year in National Pension Scheme (NPS).

The debate between saving and consumption gains more importance due to a biting economic slowdown. Indians are anyway saving lesser by the day. The country’s gross saving rate for 2019 was 30.1 percent – a multi-decade low. This means an average Indian household saved Rs 30.1 for every Rs 100 earned. In 2018, this saving rate stood at 32.4 percent. Clearly, Indians are consuming more and saving less. Buying a house is an unaffordable mountain of debt for most.

According to an RBI Residential Asset Price Monitoring Survey in 2019, housing affordability worsened over the past years with Mumbai retaining the top slot. Given this, the HRA deduction is paramount as people spend anywhere between 30 and 60 percent of their monthly incomes on house rents.

The debate isn’t whether you will save more tax in the new or the old income tax regime. The debate is whether, in a country with no financial plan for the future, prohibitive medical expenses, inadequate insurance covers and houses that may need you to pay EMIs way past your retirement, the government is justified to not incentivise citizens to invest money in financial assets?

Therefore, even if the new tax regime effectively lowers your income tax outgo, there is still a case for those deductions to continue.

In a country where investments are largely a last-minute process just to save income tax, it then becomes the moral duty of the government to force its taxpayers to save money for later life and other goals. Nirmala Sitharaman, by beginning on the journey to take away benefits of these deductions, has only set course for moral bankruptcy that a democratic government should refrain from at all costs.