Will this budget be the one that delivers on this expectation? There are some good reasons to be optimistic about the possibility of such an increase.
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The first hike in 80C came after 9 years
Section 80C in the current form took shape during the budget of 2005. But the initial limit was only Rs 1 lakh and it clubbed together many previous rebates. “Every taxpayer to be allowed a consolidated limit of Rs 1 lakh for savings which will be deducted from the income before tax is calculated; all prevailing sectoral caps to be removed; rebate under Section 88 being eliminated and Section 80L being omitted to reflect the new regime,” then finance minister P Chidambaram had said in his budget 2005-06 speech.
This limit was raised to Rs 1.5 lakh per financial year by Arun Jaitley in 2014 during his tenure as the finance minister. This was one of the substantial reliefs that the government that was formed then gave in its first budget. However, since then, there has been no hike in the 80C limit. This year, it will be 9 years from the previous increase, in 2014. So another hike can’t be ruled out entirely.
Middle-class taxpayers need relief from unprecedented inflation
There are more reasons that demand a higher relief under Section 80C. The continuous rise in living expenses has been one of the biggest pain points for the middle class. Retail inflation went through the roof last year and remained above 6% in the first 10 months of 2022 despite the Reserve Bank of India (RBI) trying its best to bring it down through record repo rate hikes. Rising interest rateshas also led to a significant increase in loan EMIs, especially for home-loan borrowers. This has further drained household budgets and shrunk disposable incomes.
As inflation has never been such a great concern in the current government’s tenure, the situation now can push the government to enhance the limit of the most popular tax-saving tool of middle-class taxpayers. “80C limit was last revised from Rs 1 lakh to 1.5 lakh in FY 2014-15, 8 years back, when the Cost Inflation Index (CII) was 240. It is 331 now, and considering the current inflation only at 6%, it comes out to about 351 for the next FY for which this increase is being discussed. With that, the current limit should be about Rs 2.19 lakh,” says
Sanjeev Govila, the CEO of Hum Fauji Initiatives, a financial planning firm.
Moreover, if we take into account the inflation from 2005-06, when the limit was first set to Rs 1 lakh, the inflation cost of Rs 1 lakh in 2005-06 stands at Rs 2.82 lakh in 2022-23 which is the true inflation adjusted limit on which the 80C relief should have been given.
A pre-budget memorandum from PHDCCI, the trade and industry body, has suggested that the deduction limit under Section 80C should be raised. “This limit was revised vide Finance Act, 2014, w.e.f. 1.4.2015 from Rs 1 lakh. It is to be appreciated that over the period of time due to inflation etc., the value of money / investment has gone down,” it said.
Tax and investment experts point out that the situation warrants an increase in the limit.
“Tax deduction can motivate people to invest. However, the limits have not been increased for a number of years. Therefore, I think the government should enhance the existing 80C deduction limit to account for inflation in the last few years,” says Rishad Manekia, Founder and MD of Kairos Capital.
Last full budget of this government before election
Most individual taxpayers had expected a big relief from the government that was formed in 2019. But it did not come.As the coming budget will be the last full budget before the general elections in 2024, it is likely that the government may offer some relief to people coming out of the difficult 2-3 years marked by the Covid-19 pandemic and the Russia-Ukraine war. Next year, the outgoing government may go for a vote on account and so any major tax-related decision might not be taken. Therefore, there is a good likelihood of the government coming up with some much-awaited relief to middle-class taxpayers a year before the general elections.
Current limit is inadequate considering the cost of living
Section 80C is not a single deduction benefit but a collection of deductions clubbed under the section. “80C is the only general income tax section available to everyone for saving some tax. This section covers a huge canvas from PPF/EPF, ELSS, NSC, NPS and SSY to life insurance policies, tuition fee and the principal part of home loans,” says Govila.
Under this umbrella, having just a few items is sufficient to exhaust the limit. “There are more than 10 things, including expenses and investments, against which a taxpayer can claim deduction under Section 80C. Most people, especially salaried individuals, exhaust the deduction limit of Rs 1.5 lakh with the mandatory contribution to provident fund. Those having children can claim deduction for tuition fees under the same section,” says Manekia.
As tuition fees and EPF contributions have gone up over the years due to inflation, there is hardly any scope left for any other tax saving under 80C.
“This leaves little scope to claim deduction for repayment of home loan principal, life insurance policies’ premium, investment in eligible small savings schemes, ELSS and so on,” says Manekia. This makes the limit inadequate if one wants to do long-term investments and save taxes.
Many organisations are voicing their support for a hike
Many organisations that want to ensure their employees have more disposable income have advocated for an increase in the 80C limit.
The pre-budget memorandum from PHDCCI says, “To provide an incentive to the taxpayers to save and invest, the limit of Rs 1.5 lakh may be considered to be increased to Rs 2.5 lakh, besides Rs 50,000 in NPS. Increased saving will help in growth of the industry / other infrastructure activities by the government at a much lower cost with availability of funds for a longer period.”
The Institute of Chartered Accountants of India (ICAI) had also suggested this move. A hike in the deduction limit of Section 80C would “provide savings opportunities to the public at large,” it said in its pre-budget memorandum.
Why a hike should be much higher than Rs 2 lakh
If the government increases the 80C limit, it would be doing it after a long gap, just like in the past. “Considering that the government takes an unduly long time to revise this limit, it should go to at least Rs 2.5 lakh, and preferably to Rs 3 lakh,” says Govila.
Giving a higher relief this time will keep the limit relevant at least in the first half of the period till the next hike — based on the fact that there is a nine-year gap between the increases. However, even a big relief would have only a limited benefit for taxpayers. “Even after increasing it to Rs 3 lakh, a major part of the investments made in the instruments covered by the section would remain taxable for a middle-class person,” says Govila.
This is because despite the hike, the taxpayers will end up paying tax on the income earned on most of the eligible investment options under Section 80C, barring some exceptions like PPF, EPF and SSA. Therefore, the 80C relief is not an all-out relief in every aspect of investment.
