The government is mulling the doubling of a ceiling covering tax breaks offered on money parked in a slew of products including bank fixed deposits, insurance premium and mutual funds from Rs 1 lakh to Rs 2 lakh a year under the popular “Section 80C” scheme.
The move, likely to be announced by finance minister Arun Jaitley in the budget for 2014-15 on July 10, is part of a broader strategy to encourage people to save more in financial instruments rather than in physical assets such as gold, which are viewed as unproductive.
Existing rules allow individuals to claim tax deductions up to Rs 1 lakh under Section 80C of the Income Tax Act for savings in products such as provident fund, national savings certificates (NSC), five-year fixed deposits, repayment of principal amount on home loans, children’s tuition fee, public provident fund, specified mutual funds and life insurance premium.
Sources told HT that the government is examining a proposal to raise this limit to Rs 2 lakh a year from 2014-15.
“Though the government would lose a chunk of revenue in the short-term (due to lower income tax collections), it will stand to gain in the long-term and that is critical at this point,” an official said.
The deduction limit under Section 80C has been at the current `1 lakh for a decade. Given the high inflation, the real value of this limit has dipped sharply.
In a recent meeting with Jaitley, bankers asked the government to raise the deduction limit. A boost in deposits would also help banks lend more, spurring investment and growth.
“Given that financial savings have not grown significantly in the last couple of years, it is imperative that it is given a boost. The government’s tax revenue foregone can be offset by gains in savings as a result of such a move,” said Soumya Kanti Ghosh, chief economic adviser, State Bank of India.