Union Budget 2020: As PM Narendra Modi-led Union government prepares to present the first budget of its second term on February 1, expectations are high that Finance Minister Nirmala Sitharaman may raise the maximum deduction limit under Section 80C of the Income Tax Act to Rs 2.5 lakh per annum from Rs 1.5 lakh and also increase annual deposit limit in Public Provident Fund (PPF) to Rs 2.5 lakh from Rs 1.5 lakh.
Experts believe that any raise in PPF deposit limit, or Section 80 C deduction limit should be in sync with each other.
"Raising the PPF annual deposit limit to Rs 2.5 lakhs needs to be in sync with the limit for deduction under Section 80C of the Income Tax Act, which should also be raised so that the taxpayers not only get the benefit of higher deduction but also the interest on PPF on the additional amount of Rs 1 lakh," Divya Baweja, Partner, Deloitte Haskins & Sells LLP, told FE Online.
What may stop the government
There could be multiple benefits of raising Section 80C deduction and PPF deposit limits for taxpayers. However, from the government’s point of view, there is one reason that may not allow it to take such a radical decision. That is, increasing Section 80C limit would likely decrease the government’s tax collection.
Archit Gupta, founder and CEO, Clear tax, said that an enhancement in the limit to Rs 2.5 lakh would provide more room for planning tax savings. It would also lower the taxable income and tax payable.
"The limit under section 80C was last enhanced in budget 2014. At present, taxpayers can claim deduction up to Rs 1.5 lakh under section 80C towards investments in PPF, NSC, LIC premium, children’s tuition fee, housing loan principal repayments and other savings. The rising costs of education for children and housing loan leave less room for savings. With an increase in the limit to Rs 2.5 lakh, a taxpayer will be able to save more in taxes and have more disposable income," he said.
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Income up to Rs 8.75 lakh may become tax-free
Gupta further said that though the decision to increase Section 80C is likely to further dent the tax collections of the government, the proposal, if implemented can meet two objectives:
First, it would give a boost to household savings which have severely declined. Also, from an economic perspective, a thrust on household savings would facilitate capital formation for the country.
Second, it would leave more disposable income for consumer spending and demand revival. A salaried individual can have a tax free income up to Rs 8.75 lakh after claiming a standard deduction of Rs 50,000 and the deductions for savings of Rs 2.5 lakh under section 80C, NPS of Rs 50,000 under section 80CCD(IB) and medical insurance of Rs 25,000 under section 80D.
According to Harsh Jain, Co-founder and COO Groww, the tax liability of persons earning up to Rs 10 lakh/year may reduce by 24% if the government raises the tax deduction limit.
"An increase in the tax deduction limit will surely incentivise savings and inculcate healthy investment habits. So say a person is earning 10 Lac and invested Rs 1.5 Lac under section 80 C, then the total tax liability would be Rs 86,000. However, if this change is implemented, the person's tax liability now would be approximately 65,000, which has reduced by 24%. This move will not only allow people to invest more and reap the benefits of steady returns from PPF, but also drastically reduce their tax liability, which is a win-win situation," said Jain.