Role of Direct Tax Reforms in Shaping Savings and Investment Behaviour in India

This study examines the impact of recent direct tax reforms in India—particularly the introduction and expansion of the New Tax Regime—on household savings and investment behaviour. With the help of Life-Cycle Hypothesis and evidence-based support of behavioural economic insights, the research investigates whether the rationalization of tax slabs has shifted individual financial decision-making from deduction-driven savings toward goal-based investment allocation. Using secondary data obtained from official publications of the Ministry of Finance and the Income Tax Department that includes ITR filing statistics and regime adoption patterns, the study analyses structural changes in taxpayer preferences. The substantial migration of taxpayers toward the New Tax Regime (72% in AY 2024–25) suggests a declining reliance on tax-incentivized instruments under provisions such as Section 80C. Historically, these deductions functioned as fiscal incentives influencing long-term savings decisions. Their reduced relevance under the simplified regime potentially alters intertemporal allocation choices consistent with the Life-Cycle Hypothesis (Modigliani & Brumberg, 1954). The study uses behavioural economics and rational choice theory to interpret the reform, especially the idea that policy “nudges” affect financial behaviour (Thaler & Sunstein, 2008). Results show that tax slab rationalization increases allocative flexibility and decreases distortions linked to deductions, but it also places more of the burden of disciplined long-term savings on individuals. The study concludes that in order to maintain national savings goals, complementary policies in financial literacy and retirement security are required, even though tax simplification improves administrative effectiveness and financial autonomy.