Comments
There was much expectation that the annual investment limit to claim tax deduction under section 80C — last increased from ₹1 lakh to ₹1.5 lakh in Budget 2014 — will get a leg-up in Budget 2019. Such hopes were dashed in successive budgets from 2015 to 2018, and again now in 2019. With the big Lok Sabha elections coming up soon, taxpayers were hoping for relief on this front, at least this time around.
In fact, former RBI governor Raghuram Rajan had supported the case for a hike in the Section 80C limit way back in 2015. His arguments then for incentivising savings — given the dip in savings rate — hold good even today. India’s domestic savings as a percentage of GDP have been on a steady decline; from about 33 per cent in 2012, they fell to 29.5 per cent in 2018. Household savings as a percentage of GDP fell from about 24 per cent in 2012 to 16 per cent in 2018.
And within this, the financial savings component fell from 7.4 per cent of GDP in 2012 to about 7 per cent in 2018; it was about 10 per cent in 2008-09. With income levels in the country increasing over the years, a higher Section 80C limit will encourage people to save more instead of spending on consumption, as has been the case over the past many years.
Spurt in cost inflation index
Besides, the Section 80C limit has not kept pace with inflation, despite the ₹50,000 hike in 2014. As a result, the real tax benefit has fallen over time.
From 2006-07, when section 80C was introduced, the limit remained at ₹1,00,000 until 2014-15, when it was increased by 50 per cent to ₹1,50,000. But this was much lower than the inflation during this period. In 2006-07, the cost inflation index notified annually by the tax authorities was at 122; this had nearly doubled to 240 in 2014-15.
The index for 2018-19 is at 280. In effect, the cost inflation index has gone up by about 130 per cent from 2006-07 to 2018-19, while the Section 80C limit has been increased by only 50 per cent. To catch up with inflation, the Section 80C limit should be around ₹2.3 lakh — an increase of about ₹80,000 from the current level of ₹1.5 lakh.
Over the past few months, inflation has been benign and real interest rates have turned positive. This would have been a good time to move money into financial assets. Since many Indians tend to invest with the intention to save tax, a good way to encourage this shift would have been to hike the section 80C investment limit.
Targeted increase
80C instruments are of three broad kinds — expenditure-based (such as home loan principal repayments), insurance-based and investment-based (the chunk including long-term bank and post office deposits, EPF, PPF, NPS and equity linked savings schemes). Had it been reluctant to provide an omnibus hike across avenues due to revenue considerations, the Centre could have considered a targeted increase in the Section 80C limit — similar to the additional annual ₹50,000 deduction for the National Pension System (NPS) in Budget 2015.
For instance, if it wanted to encourage investments in infrastructure, it could have provided additional Section 80C tax savings on infrastructure bonds. Alternatively, the Centre could have considered hiking the limit only for those in the lower to middle income brackets — for instance, those who earn up to ₹10 lakh a year. This would have curtailed the revenue that the government would have had to forego.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.