Focussed on simplification and rationalisation of taxes, Budget 2023 offered something for everybody, though there may be some looking for more tax deductions who were disappointed.
For the rapidly expanding middle class, the budget has proposed to make tax planning easier. Individuals faced the dilemma of choosing between the old and new tax regime and often found tax planning cumbersome and confusing. This budget is all about nudging citizens to accept the new tax regime by making it the default regime and allowing a standard deduction of Rs 50,000. The big draw, however, was the exemption offered on income up to Rs 7 lakh, enabling an additional saving between Rs 20,000 and Rs 40,000 in tax, every year.
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High earners were probably surprised at the reduction in the surcharge, but will have to shell out higher ‘tax collected at source’ on their overseas remittances for travel and investments.
Senior citizens can now invest more in the senior citizen savings scheme and post office monthly income scheme. This will offer them a bigger predictable income stream as return from these schemes.
A new small savings scheme has been announced for women and this is good for getting women into formal savings. Given that the returns are taxable at slab, women in higher tax brackets may give this a miss.
Rationalisation of taxes by limiting tax benefits on high value insurance policies and bringing market-linked debentures under debt taxation, are some good measures. While these investments are chosen by investors for their tax benefits, they are not appropriate for investing. Investment-linked insurance plans are costly and give low returns and market-linked debentures are equity products sold like bonds. Moreover, the usage of funds collected by these instruments is not clear.
The budget proposals on taxation signify that there may not be further changes in sections like 80C, 24 etc which have been used for tax deductions. Given this, it is time for individuals to move on to focusing on tax efficiency over tax savings. Also, with the higher cash at hand due to the new regime, people must not forget about long term financial goals.
What next?
Calculate the tax liability in old and new tax regime and plan your taxes accordingly. The one number, to always focus on, is post tax, inflation adjusted returns. Is your portfolio giving reasonable positive returns on a post-tax and post-inflation basis? If not, your work is cut out. Going forward, forget about tax exemptions and focus on tax efficiency, while choosing investments.
(The writer is Financial Educator & Founder, Finsafe India Co Founder - Womantra)