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The current budget 2023 has a great push towards New Tax Regime which has been made a default scheme of taxation. The scheme is flaunted in the interest of taxpayers on two aspects- reduced tax rates and simplicity as cited by honorable Finance Minister Nirmala Sitharaman.  The scheme is further being revised this year to make it more lucrative for the taxpayers. The basic exemption limit under new taxation regime is increased to Rs. 3 lakhs from Rs. 2.5 lakhs and tax slabs have been revised to give the additional advantage to the taxpayers.  The rebate under section 87A has also been allowed for Rs. 25000 for income upto Rs. 7 lakhs. Thus, assessee with income upto Rs. 7 lakhs will pay no tax. The benefit can be extended for income upto Rs. 7.5 lakhs for salaried class; whereby they will be allowed a standard deduction of Rs. 50,000 reducing the taxable income to Rs. 7 lakhs and tax liability will be zero by taking the benefit of rebate under section 87A.

The new tax regime may sound attractive for many small taxpayers. There is another side of the story that has been completely ignored. While the new tax regime is promoted by offering some minor advantages, the old tax regime remained untouched and no advantage is being given to the taxpayers who are making investments. This brings new tax regime in parity with old tax regime where the investments were encouraged by giving tax advantage.

Since investments by household sector help in channelizing funds to the economy and creation of wealth for the masses, the taxpayers will now get discouraged as investing is made rewardless. This will reduce investments by households and adversely affect their financial health in the long run. On the similar lines, the economy will also lose household funds in financial sector. The idea of increasing disposable income at the cost of forgoing household capital has huge costs for the economy. The lenders of funds should be incentivized, not discouraged for the sake of welfare of the nation.

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May 2024