Budget 2020: Optional income tax regime will kill tax-based investment

The new optional personal income tax regime kick started by finance minister Nirmala Sitharaman in Budget 2020-21 will discourage the tax driven investment culture because a large part of investments are still done to lower tax liability in India.

The fewer hassles of paying taxes would surely result in slightly higher taxes. The government clearly will be a gainer as the money will go directly to their coffers in terms of taxes while insurance and pension companies would be net losers.

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Experts suggest the government should have focused on better compliance. Measures like demonetisation had earlier indicated the government intention of going after tax evaders. But this new approach looks like a balancing act between economics and politics.

But there will be adverse implication of a new tax regime.

India is currently under-penetrated in terms of insurance penetration. Life insurance penetration has gone down from 4 per cent plus a decade ago to half currently. This is despite the entry of private players with global partners. Insurance is still bought for tax saving purposes. The industry will now have to spend more on education and also marketing the products.

Similarly, many tax payers invest in medical insurance partly for tax savings. Healthcare costs in India are on the rise. A large part of the country is still not insured. In fact, this exposes the entire family in case something happens to the earning member. In addition, the government started new exemption sections for contribution to pension. The pension bomb is slowly building up as the private sector doesn't offer a pension. The post reform generation is all set to retire in the coming decade with no pension benefits. The pension investments are again done to take some tax advance.

This new tax structure will actually make less funds available to the insurance and pension industry. The insurance sector, for example, is supporting infrastructure by way of long term funds. It will be hard for the industry now to see higher growth in premiums. The cost structure of the insurance industry will also get impacted as they have to invest more on education and marketing.

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