As we approach Budget Day, the expectations are gaining momentum, though this year it would be a vote on account and not many changes are expected.
Nevertheless, the recent assembly results and the government’s move to declare 10 percent reservation for economically weaker sections have raised hopes that something substantial will be there for the common man beyond just the vote of account.
Raising the basic exemption limit is on the top list of expectations, but raising the 80C deduction limit is also widely expected in the Budget.
Section 80C provides for a deduction of up to Rs 1,50,000 in relation to certain investment/payments. These include payment of life insurance premium, contribution to recognised provident fund (EPF) or public provident fund (PPF) or approved superannuation fund, subscription to NSCs or NPS or ULIPs of UTI/ LIC or other mutual funds, term deposit of five years or more, contribution towards Sukanya Smridhi scheme etc.
Even certain expenditures such as tuition fees for fulltime education and repayment of principal of housing loan is also eligible for deduction under section 80C.
The Limitations of Section 80C
Tax breaks for certain investments are not new and have always been there whether in the form of tax rebate or deduction from taxable income. In fact, Section 80C was re-introduced in 2005, allowing deduction from the taxable income in any one or more eligible instruments within the overall specified limit of Rs 1,00,000. This limit was raised to Rs 1,50,000, in 2014 when the current government took charge and presented its first Budget.
Considering the inflationary impact and the rise in income level, was the increase of Rs 50,000 in a decade, was enough? If you look at the various types of investments which are eligible for deduction under section 80C viz.
life insurance premium or contribution to EPF or tuition fees or repayment of housing loan etc. are something which on an average a salaried middle income group taxpayer will consume most part of it without any efforts or requirement to save more to save tax.
Nevertheless, such an increase was welcome as that gave more money in the hands of taxpayers which was also perhaps the purpose. Even now, this may be one of the easy way to put more money in the hands of taxpayers by increasing the limit from Rs 150,000 to Rs 200,000, which will cheer up the middle class at large as well. Yet, this move may also help to push up the household savings rate which actually have declined over the past five years.
The NPS Playbook
Recently, the government announced the changes in the National Pension Scheme (NPS) scheme and in the case of government employees, the contribution made to the Tier II account with a lock-in period of three years would also be eligible for deduction under Section 80C.
It would not be surprising while making changes in the tax laws, the government also extends the same to the private sector employees.
Further enhancement of the exemption limit for the lump-sum withdrawal at the time of retirement from 40 percent to 60 percent, has made the NPS attractive under the Exempt Exempt Exempt regime.
Then there is also an additional deduction of Rs. 50,000 available to taxpayers under section 80CCD (1B), also attracting individuals to go for it. With many more individuals joining the NPS, an opportunity to save more taxes with an enhanced deduction u/s 80C will cheer them up.
Like every year, this year too excitement of getting tax relief in general is high when the government presents the budget.
Kuldip Kumar is partner and leader, personal tax, PwC. Manavi Gupta, Manager – Personal Tax, PwC also contributed to this article. Views are personal.