It was in the financial year 1997-98 that the government first brought in income tax slabs of 10 per cent, 20 per cent and 30 per cent in what was dubbed the “dream budget” presented by the then Union Minister of Finance P. Chidamabaram. At that time, the highest tax slab applied to incomes above Rs 1.5 lakh, while income up to Rs 40,000 had no tax liability. There was a big tax incentive for investors in Provident Fund too.
Twenty-five years later, in Budget FY2023-24 announced by incumbent finance minister Nirmala Sitharaman, the highest tax slab remains at 30 per cent, but applies to income above Rs 10 lakh under the old tax regime and Rs 15 lakh under the new tax regime.
At the same time, there is no tax for income up to Rs 7 lakh under the new tax regime, taking standard deduction into consideration. The new tax regime has lower tax slabs compared to the old tax regime, but it doesn’t allow investors to claim most of the deductions available, including those under Section 80C of the Income-tax Act, 1961, and others.
Indian investors have wholeheartedly embraced Section 80C in the last 15 years, so much so that a lot of families’ savings and investments are made keeping those benefits in mind. It was reintroduced in 2006 (it was first introduced in 1967, but was replaced with Section 88 in 1991) with a maximum investment limit of Rs 1 lakh, which was later increased to Rs 1.5 lakh in 2010. Since then, despite widespread demands, the limit has not been increased, even as inflation has drained the incomes of households.
In the first two years after the new tax regime was introduced, there were few takers for it as it did not offer the flexibility to save tax for most income groups. However, in the current financial year, it has become more competitive for several income groups and can also benefit the younger generation as well as the senior citizens (read Outlook Money’s analysis and guide here:
bit.ly/3P9IgCd and bit.ly/3E7Cr1I).
Over the years, successive governments have endeavoured to simplify the tax filing process, but it’s still not clear if it has eased the lives of taxpayers. A new set of tax filing forms are introduced every year, with new requirements, leaving scope for mistakes. The system, however, is fully digitised, which has considerably reduced the paperwork burden and has also improved transparency. In a way, this has encouraged citizens to be more responsible and honest in declaring the right amount of tax on their income. One of the biggest achievements has been the quick refund process in most cases.
The Way Forward
The government’s push for the new tax regime is apparent and it will likely encourage more Indians to be responsible about their goal-based investments. It also pushes them, perhaps unwittingly, to get rid of the short-term view of saving tax for the year and focus more on long-term financial goals.
However, there is scope for further simplification to ease the process and remove laws that are open to interpretation. Another leap that the government needs to take is in simplifying and quickening the process of appeals, among many other issues.
Then And Now
Aabha S. Mathur
Aabha S. Mathur with husband Sumit, son Samarth and daughter Akaisha in 2023 (above) and 2011. Photo: Bhupinder Singh, Tribhuvan Tiwari
Delhi-based Aabha S. Mathur, now 46, was featured in Outlook Money’s regular financial planning section called ‘My Plan’ in 2011. Over the years, she has learned the importance of not putting all her resources in one place and has accordingly spread them across gold, shares, property and mutual funds. While her son has just finished his Class XII and plans to pursue engineering in the US, her daughter is busy preparing for her Class X Boards.
She has prioritised building a corpus for her children’s education overseas, recognising the potential costs associated with international education. Her love for travelling has led her to budget and save for those experiences, reflecting her balanced approach to enjoying life while being financially responsible.
She says the Covid-19 pandemic taught her the value of having a liquid emergency fund that can provide financial security during uncertain times. She says she is always willing to learn from challenges and has a long-term vision. She is now focussed on her retirement planning.