Consumption and Saving Response to a Tax-Subsidized Saving Policy: Evidence from India

61 Pages Posted: 17 Aug 2017 Last revised: 10 Oct 2018

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC)

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore

Man Zhang

University of Sydney

Date Written: August 16, 2017

Abstract

To incentivize households to increase private savings, the Indian government implemented in July 2014 a new tax-subsidized saving policy that largely incentivizes homeowners by allowing them to exempt an additional 50,000 INR ($833) of the mortgage principal and interest payments from taxable income. We exploit the exogeneous policy change and assess the extent to which households reduce their consumption in order to finance a tax-favored saving instrument using a unique administrative panel data of consumer debit card and credit card spending transactions. We find that about 31% of households with a mortgage increase the principal repayment amount after the policy change; the median annual increase in principal repayment is about US$307, which is about 36.8% of the higher tax exemption limit. We estimate that households with a mortgage reduce their consumption by US$25 (5.2%) per month on average in order to finance the tax-favored saving account. For a one dollar increase in the income tax exemption limit on long-term savings, private saving increases by $0.23 for the treatment group. Relative to annual income, private savings for the treatment group increase by about 1.87% on average.

Keywords: Tax Preferred Saving Account, Tax Policy, Consumption, Saving, Debit Cards, Household Finance, Banks, Discretionary Spending, Fiscal Policy

JEL Classification: D12, D14, D91, E21, E51, E62, G21, H27, H31

Suggested Citation

Agarwal, Sumit and Chomsisengphet, Souphala and Ghosh, Pulak and Zhang, Man, Consumption and Saving Response to a Tax-Subsidized Saving Policy: Evidence from India (August 16, 2017). Available at SSRN: https://ssrn.com/abstract=3020062 or http://dx.doi.org/10.2139/ssrn.3020062

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Souphala Chomsisengphet

Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street, SW
Washington, DC 20219
United States
202-649-5533 (Phone)

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Man Zhang (Contact Author)

University of Sydney ( email )

H69 Codrington Building
Syndey, 2006
Australia

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