RBI Governor Raghuram Rajan has timed the call for a hike in the annual investment limit to claim a tax deduction under section 80C well. As the Union Budget is just around the corner, there is a good possibility that Finance Minister Arun Jaitley will heed the call.

The arguments put forth by the Governor cannot be disputed. The country’s savings rate has dipped sharply since 2008. Of household savings, more money has been allocated to physical assets such as gold and real estate, which are unproductive, than to productive financial assets.

Financial savings as a percentage of GDP declined from 10.1 per cent in 2008-09 to 7.1 per cent in 2012-13. Savings in physical assets increased from 13.5 to 14.8 per cent in this period. With inflation in double digits since 2009, the real interest rates on financial assets have been negative over the last five years. This is one of the main reasons households preferred to invest their savings in inflation hedges such as gold.

With the decline in inflation in recent months, the real rate of interest is now close to 2 per cent. This could probably be the right time to move money into financial assets. Since many Indians tend to invest with the intention to save tax, the best way to encourage this shift would be to hike the section 80C investment limit.

Real benefit down The RBI Governor also has a valid point when he says that despite the hike in the limit to ₹1,50,000 last year, the real tax benefit has fallen over time as the limit was ₹1,00,000 for a long time.

From 2006-07 when section 80C was introduced, until 2013-14, the limit remained at ₹1,00,000. Considering inflation since then, there is room to hike the limit by at least another ₹60,000.

Better savings rate Tax experts are of the opinion that this would help improve the country’s savings rate. Aravind Srivatsan, Partner, Price Waterhouse, thinks that the government will have to take a substantial hit in its revenue if this move is implemented, but it would be the right step.

He is of the opinion that if the 80C limit is hiked to ₹2 lakh, it could be made available only to the lower income bracket — those who earn up to ₹10 lakh a year. This will curtail the revenue that the government foregoes.

MG Ramachandran, a tax expert, is of the view that the government should be clear about where the savings would be channelled and which segment it wants to incentivise. For instance if the Centre wanted to encourage investments in the infrastructure segment, it should provide tax savings on infrastructure bonds.

So, did the previous government fail to encourage savings? Not quite. Neha Malhotra, Senior Consultant, Nangia and Associates, says: “Though the Government did not bring any change in the 80C limit till 2014, other deductions were introduced to encourage investment in certain sectors, such as infrastructure, the equity market and the housing sector. In 2010, the government had introduced Section 80CCF allowing a deduction of ₹20,000 to those subscribing to long-term infrastructure bonds.”

The Rajiv Gandhi Equity Savings Scheme is another recently announced tax-saving option. Under Section 80CCG of the Income Tax Act, a new investor can get a deduction of up to 50 per cent of the amount invested in eligible securities under this scheme.

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