Budget 2020 introduced a new tax system, but it has not been widely adopted. Most people prefer the old tax system because they can take advantage of its deductions to lower their tax. Section 80C is one of the most popular tax-saving avenues that a large majority of taxpayers use. Many of these taxpayers find the limit insufficient. They waited eagerly for an increase in the limit to several budgets but were disappointed.
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After 9 years, the first increase in 80C was made The current section 80C was created during 2005’s budget. The initial limit was Rs 1 lakh, and it combined many rebates. In his 2005-06 budget speech, P Chidambaram stated that every taxpayer would be allowed a consolidated limit Rs 1 lakh to save. This amount will be deducted from income before tax is calculated. All prevailing sectoral caps were removed. Section 88 rebates were also eliminated. Section 80L was omitted to reflect this new regime. Arun Jaitley, the finance minister, raised this limit to Rs 1.5 lakh per fiscal year in 2014. This was one of many significant reliefs the government, which was established in the first budget. The 80C limit has not been increased since then. It will be 9 years since the 2014 increase. Another hike cannot be ruled out.
Taxpayers from the middle-class need relief from unimaginable inflation
Section 80C should be extended for more reasons. For the middle class, the constant rise in living costs has been a major problem. Retail inflation rose to an all-time high last year, and it remained at 6% for the first ten months of 2022, despite the Reserve Bank of India’s (RBI) efforts to reduce it through record repo rates hikes. In particular, home-loan borrowers have seen a substantial rise in loan EMIs due to rising interest rates. This has led to a further reduction in household incomes and a drain on household budgets. Inflation has not been a major concern during the current government’s tenure. This situation can force the government to increase the limit on the most popular tax-saving tool for middle-class taxpayers. The 80C limit was last updated from Rs 1 lakh to 1.5 lacs in FY 2014-15 when the Cost Inflation Index was 240. It’s 331 at the moment, and with current inflation of 6%, it will be 351 for FY 2015, for which an increase is being considered. According to this, the current limit should be around Rs 2.19 lakh.” Sanjeev Govila is the CEO of Hum Fauji Initiatives which is a financial planning company. If we consider inflation since 2005-06 when the limit was originally set at Rs 1 lakh, then the inflation cost of Rs 1.25 lakh in 2005-06 is Rs 2.82 lakh in 2022-22-23. This is the inflation adjusted limit upon which the 80C relief should be granted. The trade and industry body PHDCCI suggested that Section 80C’s deduction limit should be increased in a pre-budget memo. “This limit was updated via Finance Act, 2014. 1.4.2015 starting at Rs 1 lakh It should be noted that the value of money/investment has declined over time due to inflation and other factors,” the report said. Experts in tax and investment argue that the current situation justifies an increase in the limit. Tax deductions can encourage people to invest. The limits have not been raised in a long time. Accordingly, Rishad Manekia (Founder and MD of Kairos Capital) believes that the government should increase the 80C deduction limit in order to account for inflation over the past few years.
Last complete budget of the government before the election
Many taxpayers expected big relief from 2019’s government. It didn’t come. It is possible that the government will offer some relief for people who have been through the hard 2-3 years of the Covid-19 pandemic as well as the Russia-Ukraine conflict. The outgoing government could vote on account next year. This means that any tax-related decisions might not be made. There is a high chance that the government will offer some much-needed relief to the middle-class taxpayers in the year prior to the general elections.
The current limit is too low considering the high cost of living
Section 80C does not provide a single deduction benefit, but rather a group of deductions that are combined under this section. “80C is the only general Income tax Everyone has the opportunity to save some tax. Govila says that this section includes PPF/EPF and ELSS, NSC and NPS, SSY, life insurance policies, tuition fees and the principal portion of home loans. This umbrella covers only a small number of items that can be used to exhaust the limit. A taxpayer can deduct Section 80C from more than 10 items, which includes expenses and investments. The deduction limit of Rs 1.5 Lakh with mandatory contributions to the provident fund is exhausted by most people, particularly salaried. “Those with children can also claim tuition fees deduction under the same section,” Manekia says. There is little tax savings under 80C because tuition fees and EPF contribution have increased over the years. Manekia says that there is little room to deduct the repayment of principal on a home loan, premiums for life insurance policies, and investment in eligible small saving schemes, ELSS, etc. If one is looking to save taxes and make long-term investments, this limit is not sufficient.
Many organizations are supporting a hike.
Many organizations that wish to increase the disposable income of their employees have advocated for an 80C increase. According to PHDCCI’s pre-budget memo, “To encourage taxpayers to save money and invest, the limit at Rs 1.5 lakh could be raised to Rs 2.5 lakh.” NPS Rs 50,000 may also be considered. This move was also recommended by the Institute of Chartered Accountants of India. It stated in its pre-budget memo that a hike in Section 80C’s deduction limit would “provide savings opportunities for the public at large.”
Why should a hike be higher than Rs 2 Lakh
The government would have to increase the 80C limit after a long period of time, just as in the past. Govila says that it is too slow for the government to revise the limit. Govila suggests that it be increased to at least Rs 2.5 lakh and preferably Rs 3 lakh. A higher level of relief will ensure that the limit is still relevant for at least the first half-year before the next hike, based on the nine-year gap between increases. Even a large relief would only be of limited benefit to taxpayers. Govila says that even though the limit was increased to Rs 3 lakh, the majority of investments in the instruments included by the section will still be taxable to a middle-class individual. The reason is that, despite the increase, taxpayers will have to pay tax on income earned from most eligible investment options under Section 80C. There are some exceptions like EPF, PPF, and SSA. The 80C relief does not cover all aspects of investment.
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