The Telegraph
Wednesday , June 11 , 2014
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Bid to raise tax savings limit

New Delhi, June 10: The finance ministry is mulling a proposal to raise the ceiling for tax breaks on saving instruments, which currently stands at Rs 1 lakh under section 80C of the income tax act, besides an additional Rs 15,000 for health insurance.

Officials said though there were demands to double the ceiling, they were considering an overall limit of Rs 1.5 lakh per tax payer from all savings instruments and would stick to this as “too many tax-give-aways will make it impossible to balance the budget books”.

The demand to increase the ceiling came on Saturday after the meeting of a Financial Stability and Development Council (FSDC) in Mumbai where all the financial market regulators met finance minister Arun Jaitley.

The FSDC members felt there was a need to raise the country’s savings rate, which had been falling steadily. The savings-to-GDP ratio has declined from a high of 36.9 per cent in 2007-08 to 30.1 per cent in 2012-2013.

“We heard bankers reiterating the demand today at a meeting with the finance minister where they wanted it (the ceiling) to be doubled. They pointed out that the cap was set in 2001 and inflation had eroded the value of rupee since then,” officials said.

“However, we cannot go the whole hog and give huge tax sops. It will impact revenues and increase government borrowing,” they added.

Section 80C of the income tax act permits individuals to lower taxable income by Rs 1 lakh through savings in public provident fund, fixed deposits, mutual funds, life insurance and pension funds. Another Rs 15,000 can be saved via health insurance.

The government may consider a middle path and increase the total savings ceiling to Rs 1,50,000. “Even this will be a considerable tax sop,” officials said.

To encourage home buyers, realtors want the government to increase the deduction limit both under Section 80C and Section 24. While income tax deduction can be claimed on the principal component of a home loan under Section 80C, interest payment up to Rs 1.5 lakh is eligible for deduction under Section 24.

There has also been suggestions to float tax-free infrastructure bonds as was done in 2011 by the previous UPA government.

Several tax consultants have made out a case for increasing the overall tax exemptions to Rs 3 lakh as a consequence of inflation eating into the value of savings. They argue that such a move will place more money into the hands of the people and this will lead to higher spending, which could kick-start the economy.

However, officials feel such a multiplier effect is little exaggerated as the number of tax-payers in our country is limited and a mere 4 lakh people account for 60 per cent of all taxes paid.