ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Personal Taxation and Private Financial Savings in India

This paper examines rates of return to Indian private financial savings instruments after personal taxation. A sample of about 30 assets is considered, including the most popular savings instruments. It is found that the ranking of assets after income taxes differs across tax brackets, which implies a distortionary tax system. Further- more, tax deductions favour upper bracket taxpayers the most, so much so that tax incentives for savings may end up discouraging saving in higher brackets due to excessive subsidies. It is also shown that the term structure of interest rates displays only a weakly increasing pattern as the holding period increases. The treatment of assets under current tax practice is also compared to proportional expenditure taxes using the Index of Fiscal Privilege Budgetary implications of tax concessions are analysed and found, in many cases, to be a cause for concern. Some comments on the implications of these findings for investment bnd government debt are also made.

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