Impact of the new tax regime on borrowing capacity of the general public

The new tax regime in India, introduced under Section 115 BAC of the Income Tax Act and made the default regime from FY 2023-24 onwards, has implications for the borrowing capacity of the general public. Here's an analysis of its impact:

Overview of the New Tax Regime

Lower Tax Rates: Offers reduced slab rates compared to the old regime.

No Deductions/Exemptions: Most common deductions (like Section 80C, 80D, HRA, and home loan interest under 24(b)) are not allowed.

Default Regime: Taxpayers must actively opt out to use the old regime.

Impact on Borrowing Capacity

1. Reduction in Reported Disposable Income (for some taxpayers)

In the old regime, deductions (like housing loan interest, ELSS, LIC premiums, etc.) reduce taxable income, showing higher effective disposable income.

In the new regime, since deductions are not allowed, net taxable income appears higher, which could inflate the tax burden for individuals with large deductions previously.

Impact: This may reduce disposable post-tax income, thereby affecting repayment ability and lowering borrowing capacity in some cases.

2. Home Loan-Related Implications

No deduction for home loan interest (Section 24(b)) or principal (Section 80C) under the new regime.

This removes a key incentive for homebuyers and can make EMIs financially more burdensome.

Impact: Financial institutions may view the borrower's debt servicing ability as weaker, especially for housing loans.

3. Improved Liquidity for Some (Without Many Deductions)

For individuals not claiming many exemptions/deductions, the lower tax rates under the new regime can increase their net take-home income.

Impact: This can actually improve their eligibility for loans (higher disposable income), especially for unsecured loans like personal loans or credit cards.

4. Change in Credit Behavior and Risk Assessment

Lenders may need to reassess risk profiles, as the tax regime affects cash flow and the pattern of tax savings.

Borrowers may need to furnish more comprehensive financial details beyond ITR to show real disposable income.

Conclusion

The new tax regime can both positively and negatively impact borrowing capacity depending on the taxpayer's profile:

Negative impact for those heavily reliant on deductions (e.g., home loan borrowers, salaried with high HRA, investments under 80C).

Neutral or positive impact for those with fewer deductions and higher salary slabs, benefiting from lower tax rates.

Banks and NBFCs may gradually adjust their underwriting models to factor in these shifts in disposable income and tax behavior.