There is good news for the small investor as finance minister Arun Jaitley, presenting his maiden union budget, increased tax exemption limit for investments from Rs 1 lakh to Rs 1.5 lakh under Section 80C of the Income Tax Act. Until now, investments up to a limit of Rs 1 lakh get exemptions under Sections 80C, 80CC and 80CCC of the Income-Tax Act.
The move will leave more money in the hands of the salaried class, hit by rising prices.
For instance, if your annual income is Rs 10 lakh and you have invested Rs 150,000 in financial instruments under Section 80C during the year, your tax will now be calculated on an income of Rs 8.5 lakh.
Besides, it would significantly boost domestic household savings in the country and will also encourage people to save more in financial instruments rather than locking up surplus funds in unproductive physical assets such as gold.
While Jaitley said the estimated loss from all direct tax exemptions could be to the tune of Rs 22,000 crore, it can be offset by other measures which have been taken to boost the economic growth. “The hope is that the economic activity picks up and so the concerns are addressed,” he said after presenting the budget.
The savings rate which was over 38% of GDP in 2008 has come down 30% in 2012-13. Total household savings in India at the end of 2011-12 - the latest for which data is available—stood at Rs 20.03 lakh crore. Nearly two-thirds of these savings (64% or about Rs 12.84 lakh crore) were in physical assets such as gold and real estate, with remaining (36% or about Rs 7.19 lakh crore) in financial savings such as bank deposits, mutual funds and company shares and debentures.
The Direct Taxes Code (DTC) too had a recommendation to increase the combined ceiling for investments and expenditures to Rs 1.5 lakh per annum. The financial sector including banks and mutual funds had also made a demand for an increase in the investment limit.
“It is a positive move..the revenue foregone as a result of such an exercise could be far outstripped by the incremental gain in savings as a result of such a move,” Soumya Kanti Ghosh, chief economic adviser, State Bank of India told Hindustan Times.
Banks, mutual fund companies and other financial sector operators had made a strong pitch to the government to increase the investment limit and boost household savings.
According to estimates, these measures would lead to savings of over Rs 15,000 for those in the 10% tax bracket, about Rs 25,750 for those in the 20% tax category and over Rs 36,000 for individuals who come in the 30% bracket.
“The measures to enhance the exemption limit for individual tax-payer from Rs 2 lakh to Rs 2.5 lakh and increase the investment limit under section 80C will add to the purchasing power of the individuals as well as boost the overall savings level in the economy respectively,” Sidharth Birla, president, FICCI said.