SAVING AND CONSUMPTION RESPONSE TO INCOME TAX EXEMPTION POLICY: EVIDENCE FROM INDIA

Abstract

I use a unique panel data of consumer financial transactions to study whether the tax subsidized saving policy increases private saving. The income tax exemption limit for the long term savings including principle repayment for home loan was increased by 50,000 India Rupee in July 2014. I find that 21.54 % of the home loan borrowers increase the principle repayment for their home loans and the average incremental amount is 16,425 India Rupee in the next year. Relative to their closely matched counterparties without home loans, the home loan borrowers on average reduce 193 US dollars on consumption by the end of FY2014-2015. The reduction in consumption persists in the next fiscal year. The effect is more pronounced for the male, young, single and low income individuals. Thus, I argue that, for a sub group of the population, the tax subsidized saving policy can effectively induce more private saving.