The last time the Section 80C exemption limit was updated was in the 2014-15 Budget when it was raised from Rs 1 lakh to Rs 1.5 lakh.
With the Budget 2019 just around the corner, taxpayers have high expectations. The rumour mills have fueled the speculations on what the Finance Minister may have in store for this interim budget. It may be safe to say that most of the taxpayers are looking forward to an update on whether they will be able to save more tax. In the upcoming budget, it is speculated that the government may announce a change that might increase the take-home pay, by either increasing the deduction under Section 80C or raising the income exemption limit.
Section 80C is fundamentally an investment-oriented tax-saving avenue. Simply put, it functions as a way for people to save on taxes and grow their savings. As of now, Section 80C allows a deduction of Rs 1.5 lakh p.a. for investments in life insurance policies, Equity Linked Saving Schemes, Public Provident Funds, National Saving Certificate, Employee Provident fund, tax saver fixed deposits, etc.. Certain expenses and outflows such as tuition fees and principal repayment on home loans, etc. are also eligible.
The last time the exemption limit was updated was in the 2014-15 budget when it was raised from Rs 1 lakh to Rs 1.5 lakh. Given the due passage of time and the current rate of inflation, now would be a good time for the government to update the exemption limit. Currently, most of the Section 80C limit of Rs 1.5 lakh does not provide enough room for all the items that qualify under it. Hence the taxpayers are not able to take full advantage of Section 80C. With an increment in the deduction limit under Section 80C, many taxpayers will be able to grow their savings. If the government does increase the said limit, it could be a blanket increase or could be restricted to a few of the tax-saving avenues listed under Section 80C.
For instance, a salaried individual with a high basic salary exhausts a major portion of his/her Section 80C limit in the EPF contributions alone. Also, taxpayers paying children’s tuition fees and/or paying EMIs on a home loan will fully consume the Section 80C tax benefits, after claiming for these expenses, leaving no room for other beneficial expenses. So, if the limit is raised, the taxpayers would be able to save more taxes and plan their finances better.
Assuming the government decides to increase the 80C limit only specific to certain avenues, ELSS would be a good choice. Over the last few years, ELSS funds have done exceptionally well. Increasing the deduction limit on Section 80C would give the taxpayers the chance to build up substantial savings and achieve their long-term financial goals.
Currently, the equity-oriented mutual fund only qualifies for tax deduction under Section 80C. Asset classes such as debt funds and hybrid funds, which are the go-to investment instruments for conservative investors, are left outside the ambit of Section 80C. The risk-averse individuals are very hopeful that the Union Budget 2019 may consider the inclusion of debt/hybrid funds under Section 80C.
With the government’s push for the real estate sector’s development, there could be some incentives under Section 80C for home buyers. An additional tax benefit of Rs 50,000 can be expected on the principal component of the home loan. The home loan takers can pay an ad-hoc amount towards the loan and avail maximum benefit under Section 80C. This increment will also encourage the new borrowers and also, add to the development of the real estate sector. However, real estate on the whole from both direct and indirect tax standpoint needs to be looked at holistically, for a proper revival.
Increasing 80C limit will certainly cause a dent in tax collections and therefore the finance minister has a tough job ahead balancing taxpayer expectations and keeping a check on tax collections.
(The author is Founder & CEO, ClearTax)