The Telegraph
Since 1st March, 1999
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Rate cut outweighs tax break gains

New Delhi, March 6: Higher income tax exemptions and a slew of tax breaks will be neutralised by the 1 per cent interest rate cut on small savings plans coupled with rising inflation. Investors are, therefore, strapped for choices on investment opportunities.

The average rate of inflation in 2003-04 is expected to hover around 5 per cent with a projected rise in demand for manufactured goods, higher energy costs and a lower wholesale price index effect.

“The budget will definitely affect the lower or middle-income groups,” said Amitabh Singh, partner, Ernst & Young, a global financial consultant and audit firm.

Rajiv Basu, managing director of Deloitte Touche Tohmatsu, added, “The reduced rates of interest on public provident fund is good for the fund, but it isn’t good for the pensioner.”

Let’s take the example of an individual earning Rs 2 lakh a year. He will pay out Rs 1,700 less by way of taxes this financial year because of the increase in the tax exemption on account of standard deduction coupled with the removal of 5 per cent income-tax surcharge.

Over the years, the same individual would have saved about the same amount, that is, Rs 2 lakh in various small saving schemes in order to save on taxes as well as to provide for a rainy day. By cutting the interest rate on this by 1 percentage point, in effect the government has reduced this individual’s income by Rs 2,000.

What the finance minister has given with one hand, he has taken away with the other. In fact, it’s a mite more in this particular case. If an individual earns Rs 3 lakh a year, he will save about Rs 2,500 in tax-breaks. But, if he has saved Rs 3 lakh in small saving schemes, he similarly loses about Rs 3,000 in income from interest on it.

“Besides affecting the welfare of individual taxpayers, the government has left individuals with few safe options to put in their money, especially ones where they can also save on taxes,” said K. K. Sengupta, a leading merchant banker.

Currently, an individual to avail a tax benefit of Rs 15,000 can save a maximum of Rs 1,00,000 — Rs 70,000 in insurance policies or children’s education, National Savings Certificate and provident funds and the remaining Rs 30,000 in infrastructure bonds.

Tax analysts said the government has not provided “much-of-a-thought” to its own employees, middle income groups and older people in this regard.

“The rate cut would have been neutralised had the government raised the investment cap in tax-saving deposits,” said a tax-consultant with an industry body.

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