Income Tax Rates Cuts; Don’t Rejoice As There Is A Catch

As soon as the income tax rate cuts were announced, there was great joy. However, the Finance Minister was clear in her speech that you would be getting a reduced rate, only if you do not claim certain exemptions.

According to some reports, certain investments like life insurance premium, provident fund etc., will not qualify for deductions. One has to still read the fine print, but, if most of the exemptions go, the new tax rates hardly remain lucrative.

The finance minister is clear that in the long-run tax exemptions would go. At the moment, those, who have housing loans, pay health insurance premium, life insurance etc., qualify for tax rebate under three different sections. They get SEC80C benefits, apart from 80D for health insurance and sec 24 for exemption on interest on housing loans.

If all these benefits were to go, an individual who is even in the highest tax bracket is unlikely to gain.

Consequences can be disastrous

If all tax exemptions were to go in the long-run it would be disastrous for the economy. Take for example the impact on the housing and real estate sector.

While the idea was to boost the housing and real estate sector, with no tax breaks on home loans, the government may have done an unwise thing. Individuals may not even want to take an health insurance, if those exemptions are not available.

Even mutual funds are likely to be hit badly. If you go for the new tax regime, you may not want to invest in ELSS as sec 80C benefits would be done away with. This could be a big dampener to the mutual fund industry.

In short, the new tax regime can hit the health insurance sector, life insurance sector and also the mutual fund industry.