Govt needs to raise Section 80C of the Income-Tax Act limit to Rs 5 lakh

Written by Vikas Vasal | Updated: Jun 27 2014, 18:22pm hrs
One of the key challenges before the new government is to meet the heightened expectations of stakeholders and to contain the fiscal deficit. This year and the following years Budget will be a reflection of this dilemma, till the economy is back on track with over 8% growth and a manageable fiscal deficit. No doubt, one of the key themes of this years policy changes would be to boost investment, which, in turn, should lead to steady job creation.

Another area that requires attention is the falling savings rate in the economy. Households constitute the largest source of domestic savings. So it is imperative that measures are taken to encourage household savings, and make these funds available to boost economic activity. One of the popular tax deductions availed by individuals and Hindu Undivided Families is under Section 80C of the I-T Act and that requires some reconsideration.

This deduction is limited to R1 lakh per fiscal for investments made in various tax-saving schemes, such as Employees Provident Fund, Public Provident Fund, National Savings Certificate Schemes, Post Office Schemes, deferred annuity schemes, approved superannuation fund, specified mutual/pension funds, payments made towards life insurance, expense incurred on children's tuition fee to university, college, school or other educational institutions situated within India, specified term deposits with a bank, etc.

It has been observed that this tax deduction encourages households to save funds for retirement and to meet contingencies. These funds, in turn, are utilised to meet larger socio-economic objectives of the country.

The limit of R1 lakh is not in line with the current economic reality and has not kept pace with the rising inflation. It should be enhanced to R5 lakh to make it a meaningful tax-saving investment option for households.

Over time, tax deduction has got bit cluttered with an array of investment and expense options, that are meant to achieve very different objectives. For example, while PF is meant for long-term savings, expenses incurred on childrens education are meant to provide relief to households to meet their monthly or quarterly childrens education expense.

Interestingly, it is only childrens education expense that is covered here, and not the expenses incurred on education for self and spouse, which is required in todays scenario as many people have to undergo learning programmes to skill or re-skill themselves. Similarly, premium paid for life insurance stands on an altogether different footing. These polices are meant to help family cope with financial stress on the demise of an earning member. Therefore, there is a need to review this tax deduction vis--vis various investment/expense options that are currently covered.

Another point that merits attention is that different instruments under this provision have different overall tax treatment. For example, PF schemes work on the Exempt-Exempt-Exempt principle, i.e., investment is eligible for tax deduction, interest earned is tax-exempt, and the maturity amount is not taxed. On the contrary, though investment made in specified bank deposits is eligible for tax deduction, the interest earned is taxable, which leaves little net of tax interest income with There is a need to review various instruments from their tax treatment angle as well.

The writer is partner, KPMG in India