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Should We Expect Cuts in Personal Income Tax Rates to Boost the Economy?

By Finserv MARKETS - Dec 19,2019
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Should We Expect Cuts in Personal Income Tax Rates to Boost the Economy

The Finance Ministry’s recent announcement about corporate tax cuts has left Indian taxpayers hopeful that a similar move may be coming with regard to personal income tax. If it does come, it would be a much-needed reform, considering that the highest slab rate involves tax charged at 30% of the income over Rs. 10,00,000.

Should We Expect Cuts in Personal Income Tax Rates to Boost the Economy

Source: timesofindia.indiatimes.com

One way to hedge yourself against steep tax payouts is to make investments that offer tax benefits. Term insurance, for instance, is an investment that can help you lower your taxable income. On Finserv MARKETS, you’ll find that it’s easy to apply for group term life insurance. This is a kind of cover wherein a single life insurance policy covers a group of people. ULIP is another tax-saving investment option available on Finserv MARKETS. ULIPs offer a three-fold benefit – you get to save tax, you obtain insurance coverage, and you make a worthwhile investment. Finserv MARKETS offers child plans, retirement plans, and investment plans related to ULIPs.

Should We Expect Cuts in Personal Income Tax Rates to Boost the Economy

Source: paisabazaar.com

If the expected cuts in income tax rates do get implemented correctly and in time, they just might help revive a slowing economy. Here’s how this may be possible.

It would leave people with more money in their hands

With a reduction in personal income tax rates, people would have to pay less taxes than they do now. As a result, they’re left with more dispensable money after paying taxes. This helps increase the purchasing power of the people. The current scenario in the country has seen a drop in consumption levels, because the people’s confidence has fallen consistently despite the festival season ringing in many discounts. Lower tax rates might help fight this situation and encourage the public to be less tight-fisted. And when public expenditure rises back to normal levels, the resultant flow of money in the country’s economy will help fight the slowdown.

It can revive the economy’s waning demand

Measures like corporate tax cuts improve things on the supply side of the economy. However, at the core of India’s economic crisis is a demand problem. The impact of corporate tax cuts and banking mergers will take a long time to trickle down to the grassroots level. On the other hand, cuts in personal income tax rates will have the immediate effect of boosting demand. With more money in their hands, people will choose to spend it on goods and services. This increase in demand will perfectly complement the boost in supply that’s waiting to take effect.

Personal income tax rate cuts can boost investments

Cutting the rates of personal income tax will also leave people with extra funds, which they might choose to invest. Most smart investors might choose to diversify their portfolio by choosing both high-risk as well as low-risk investments. Some investment options even offer tax benefits that can reduce your taxable income further. For example, investing in the National Pension Scheme can give you additional tax benefits in the form of extra deduction up to Rs. 50,000. You can open an NPS account on Finserv MARKETS using a simple, hassle-free process. Alternatively, you could also avail health insurance from Finserv MARKETS if you want to enjoy tax benefits linked to your investment.

With a reduction in income tax rates, people will find it easier to make more such investments. This essentially results in an inflow of money into various institutions like banks, NBFCs, insurance companies, and corporate entities. This fiscal movement breaks the static state of the economy and promotes the flow of money between its various segments.

Such a reduction would promote voluntary compliance

Currently, it’s estimated that only around 5% of the country’s population pay their taxes. Lowering tax rates is likely to turn this situation around by prompting more people to pay income tax. This potential rate cut might reduce the percentage of people engaged in tax evasion and encourage voluntary compliance. Even if only a small segment of people do this, it would mean an increase in the government’s tax revenue. This inflow can give the government more funds to implement schemes and strategies that will boost consumption and revive the economy.

Demand and supply are irrevocably linked, and implementing measures to only resolve issues on one side will not have the impact needed to get the country’s economy out of the slump. Introducing cuts in personal income tax rates to complement the corporate tax cuts might just be the combination of strategies that can revive demand quickly. With an increase in demand, industries, banks, and other segments of the economy also stand to benefit.

In the meantime, until these measures are implemented, you can still reduce your taxable income by investing in tax-saving investments such as ULIPs, life insurance policies, or health insurance plans. If you’re unsure where to begin, on the Finserv MARKETS online portal, you can browse through the various tax-saving investment options available out there.

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