Giving a boost to domestic savings as well as bringing some good news for the common man, the government is considering a proposal to further enhance the investment limit under Section 80 C of the Income Tax Act, 1961.
“The issue has been raised that the limit is not enough and does not help household investors channel sufficient savings. But its implications on tax collections also need to be examined,” said a person privy to the development, adding that if the proposal passes muster, a formal announcement could be made in the Union Budget 2015-16 that will be presented later this month.
The Centre had raised the investment limit to Rs 1.5 lakh per annum in the Union Budget 2014-15 from the earlier limit of Rs 1 lakh per year. Contributions to provident fund, life insurance plans, pension schemes, equity linked savings schemes, home loan repayment, small saving instruments as well as tuition fees. These are eligible for an income tax deduction.
The proposal, if it passes muster, could see the investment limit enhanced by another Rs 20,000 to Rs 50,000 annually.
The move will also help spur the domestic savings rate that in turn could help the government increase spending on capital assets. The higher limit has already led to a sharp spurt in deposits to the public provident fund to Rs12,880.65 crore in the first nine months of the fiscal as against a mere Rs 7,820 crore in the same period last fiscal.
Sources said apart from more savings in insurance and provident fund schemes, a higher investment limit could also aid the government’s two newly launched small saving instruments —Kisan Vikas Patra and Sukanya Samriddhi Account.
Sources said bankers and insurance companies had sought a higher tax deduction limit under Section 80 C at the pre-Budget meeting with finance minister Arun Jaitley last month. At the time, the income tax department was asked to calculate the revenue implication from the Rs 50,000 crore hike in the limit that was announced last July.
The proposal has also found favour with Reserve Bank of India governor Raghura Rajan who called for increasing the tax exemption limit on financial investments by individuals from Rs 1.5 lakh a year as the real tax benefit has fallen over time because the limit was at Rs 1 lakh for a long time.