In public forums, Indian policymakers and politicians like to constantly fret about inflation. Onion prices seem to have a far greater impact on political fortunes than the size of the fiscal deficit. But why then does inflation get little attention in the Budget-making exercise?

Every Budget is preceded by a heated debate on whether the basic income tax exemption limit, the Section 80C limit and various other tax breaks for the middle class need to be shifted upwards. Usually, whether these demands are granted depends on whether the Government of the day is flush with cash or operating on a shoestring budget.

But there is a far simpler and more equitable way to decide on these tax breaks. Why not adjust them regularly for inflation?

In sync Looking back at tax breaks to the salaried and the middle class over the last ten years, some have kept pace with inflation but others have not.

Take the basic income tax exemption limit (the first slab) for the salary earner. From ₹1 lakh in April 2005, it climbed to ₹2.5 lakh by July 2014. That’s a 250 per cent increase, higher than the 220 per cent rise in the Consumer Price Index over this period. But that increase in the basic exemption limit has come in fits and starts.

Between 2005 and 2012, the Government hiked the basic exemption limit for income tax almost every year. The ceiling for the first tax slab rose from ₹1 lakh to ₹2 lakh in those years. But in 2012 and 2013, the slabs froze. Despite high inflation, the first slab stayed put at ₹ 2 lakh. It was raised to ₹2.5 lakh in the July Budget.

Not for the retired

Tax slabs that don’t budge are an even bigger problem for the retired. Between 2009 and 2014, the CPI has soared 68 per cent in absolute terms. But the amount of tax-exempt income allowed to 60-plus citizens has only gone up by 25 per cent (₹2.4 lakh to ₹3 lakh).

The situation is better for super senior citizens (80-plus individuals), whose exemption limits have gone up to ₹ 5 lakh. But can 60-plus citizens, who may have high medical expenses to contend with, really get by on ₹20,833 a month?

Effectively, if the basic tax exemption limits do not move in step with inflation, it means that the Government is benefitting from inflation at the expense of the tax payer.

If your employer is granting you increments in line with inflation, the Government gets to take away a disproportionate share of it as you move up the tax scale!

But even if your take-home pay, after taxes, hasn’t fared so badly against inflation in the last ten years, the same cannot be said for your savings.

Savings limit Ever since the standard deduction on salary income was removed and Section 80C introduced, putting your money in the tax-exempt investments listed under 80C is your only tax-efficient avenue for financial savings. For many people, 80C investments are the only financial savings they can afford to undertake out of their annual income.

Yet, this limit has seen hardly any revision in the last ten years. From ₹1 lakh in 2005, the 80C limit has moved to ₹1.5 lakh in the 2014 Budget. But if you account for inflation, an investment of ₹1 lakh made in 2005 is equivalent to at least ₹2.53 lakh today.

Therefore, people who have continued to rely only on 80C for their annual savings have actually been trimming their savings every year, in real terms. Hardly the route to a comfortable retirement!

Then there are monetary limits fixed by long-ago FMs which are sorely in need of revision too. These are, one, the ₹10,000 exemption (Section 80TTA) for interest earned in a whole year on savings bank accounts. Two, the all-in-one medical insurance premium of ₹15,000 a year (Section 80D) for self, spouse and dependent children.

Three, the ₹50,000 yearly concession for taking care of a disabled person in the family. Four, the ₹2,000 a month deduction towards rent for those who don’t receive HRA.

Let’s hope the FM remembers the ‘I’ word this time around!

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