How part 80C of I-T Act has fallen out of sync with inflation

“When I claimed deductions beneath 80C for the primary time 9 years again, my youngsters’s tuition charge was ₹22,000. Inflation has pushed up the charges by 5 instances however the funding restrict beneath part 80C has remained unchanged,” he stated.

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Graphic: Mint

Chahar is true. The final time the 80C restrict was elevated was in 2014— from ₹1 lakh to ₹1.5 lakh. This hike itself got here after 9 years but it surely was not in step with inflation. The Cost Inflation Index (CII) noticed a rise of 105% between 2005 and 2014 whereas the 80C funding restrict was elevated by a mere 50%.

“I hope the federal government will increase the restrict to no less than ₹2.5 lakh,” said Chahar. The Institute of Chartered Accountants of India (ICAI), in its pre-budget memorandum 2023, has also suggested that the deduction limit under section 80C be increased to ₹2.5 lakh. ICAI said the hike will provide savings opportunities to taxpayers, which was also the original thought behind introducing section 80C.

“Section 80C was introduced in 1968 with the purpose of allowing tax relief to individuals and Hindu Undivided Families (HUFs) through the provision of deductions from their gross total income for specified investments and expenses,” stated Sujit Bangar, founding father of Taxbuddy.com. After a number of modifications over time, 80C in its present kind was launched in 2005 by then finance minister P. Chidambaram.

“…it’s essential to encourage financial savings, and tax reduction is a technique to induce individuals to save lots of. Further, I believe that the State have to be impartial between one type of saving and one other, and permit the taxpayer larger flexibility in making financial savings/funding choices. For all these causes, along with the fundamental exemption limits, I suggest to permit each taxpayer a consolidated restrict of ₹1 lakh for financial savings which will probably be deducted from the revenue earlier than tax is calculated,” Chidambaram stated in his speech.

But, the present restrict of ₹1.5 lakh is insufficient on condition that the worth of investments has decreased over time resulting from inflation. So, an enormous expenditure, resembling registration charge and stamp responsibility in the direction of a house buy or youngsters’s tuition charges, can take up your entire ₹1.5 lakh restrict in a monetary yr.

Kalpesh Ashar, founder, Full Circle Financial Planners and Advisors, and a Sebi Registered Investment Advisor (RIA), stated for high-income earners, necessary provident fund (PF) contributions alone max out the 80C restrict and there’s no scope to make further investments for the aim of tax-saving.

Mumbai-based Preeti Grover Mahajan’s is a working example. Her contributions in public provident fund (PPF) and staff provident fund (EPF) in a monetary yr totals as much as about ₹1.5 lakh. She used to say deduction on funding made in Equity Linked Savings Scheme (ELSS) up to now, however over time, with enhance in her revenue and simultaneous enhance in EPF contribution, ELSS now not kinds part of her 80C plan. Mahajan’s time period plan premiums additionally qualify for 80C deduction, however she is unable to make the most of that as effectively.

“For excessive revenue earners, the ₹1.5 lakh ceiling is a drop within the ocean. Despite making massive investments, most of them stay taxable for me. The funding restrict beneath part 80C could be elevated to ₹3 lakh,” said 40-year-old Mahajan.

There has also been a long standing demand to declutter section 80C and allow separate deductions for some essential expenses, such as the premium payments for life insurance policies. “We advise our clients to buy pure term insurance irrespective of whether they are able to claim a deduction on it or not. Offering tax sops on term plans through separate deduction, as is the case with medical insurance premium, will encourage people to buy it,” stated Ashar.

A consolidated restrict by combining most main financial savings choices and bills beneath part 80C was launched solely in 2005, previous to which separate deductions with completely different limits had been obtainable on ELSS funds and pension plans, amongst different choices.

Over the years, revenue tax legal guidelines have mixed most main financial savings choices and bills beneath a single ceiling of part 80C. This just isn’t the case in most different international locations (see graphic). For occasion, within the US, contributions to a person retirement account of as much as $6,000 ( ₹4.9 lakh) is deductible. Over and above this, taxpayers can go for flat customary deduction that ranges from $12,550 ( ₹10.25 lakh) to $25,100 and full deduction on sure expenditure, together with medical bills, curiosity bills in the direction of dwelling mortgage and investments, charitable contributions and playing losses.

Similarly, in Japan, separate tax deductions of 40,000 yen ( ₹25,120) every are provided on life insurance coverage premium, pension premium and nursing care insurance coverage premium and as much as 50,000 yen for earthquake insurance coverage contracts. Social insurance coverage premiums are totally deductible in Japan.

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