BY NOW, IT IS CLEAR TO every individual taxpayer that he or she will pay a lot less in taxes next year. I don't have a record of tax cuts made in the past but this must be the biggest reduction in a single year for most people since the age of socialist tax rates ended. However, is the budget all good from a savings and investment perspective? It certainly looks like at this point.
The broadening of the tax slabs leaves a lot more in the pockets of many taxpayers. Of course, we should actually be asking a question that I'd written about two weeks ago — why don't we have a system whereby the slabs can be adjusted upwards by an inflation linked amount annually?
But that's unlikely to ever happen — why would finance ministers give up their chance to be seen doling out largesse. And so the 80C limit stays stuck at Rs 1 lakh. However, the government has effectively added Rs 20,000 to it if that amount is invested in infrastructure bonds. That's not as good as having the freedom to invest wherever is most suitable for an individual, but at least it does act as a long over due enhancement to the Rs 1 lakh limit.
Beyond the obvious tax changes, the budget speech had something really interesting as far as the encouragement of savings goes, and that's the new scheme to encourage a new class of savers to come into the New Pension System (NPS). So far, the NPS has not been a marketing success in the absence of commission-earning agents.
The finance minister has unveiled an innovative way to try and fix this problem. The government will give what amounts to a joining gift to potential savers below a certain savings level. In what must be a first of its kind, the government will give Rs 1,000 per year for three years. This scheme is open only to those who deposit less than Rs 12,000 per year and start their account in 2010-11. This is a brilliant instance of paying direct subsidy in a way that is designed to encourage people to save. The scheme could well be the impetus that the NPS needs to do its job.
PLAYING SAVE
• FM's boost to NPS is a brilliant instance of paying direct subsidy to encourage people to start saving
• Extension of 80C is good, but doesn't give investors the freedom to decide where to put in their money
