Income Tax 28 Jan,2020
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Increase in threshold limit of section 80C to boost investments
Reena PoddarManager with Deloitte Haskins and Sells LLP
Aarti RaotePartner with Deloitte India

Section 80C is one of the most popular avenues that individual tax payers have to save on taxes. Prior to 2006, a tax rebate was available under section 88, of INR 14000. However the then Finance Minister sought to change from tax-based rebate to an income-based deduction on investments, to provide homogenous treatment to taxation of tax saving investments. The limit for claiming a deduction in 2006 was INR 100,000.

Currently section 80C provides an individual taxpayer a deduction up to INR 150,000 if the taxpayer invests or expends sums into funds approved for this section and meets the required conditions. A significant taxpayer base primarily relies on this avenue for life insurances, retiral benefits, etc. However, they would invest only up to the tax threshold and hence the sums expended may not be enough to cater to the growing needs, post retirement. Hence, considering that the limit has not been revisited since 2015, the Finance Minister can certainly look at an increase in the limit.

The popular investment options under section 80C can be broadly categorised as under:

Investments in approved bonds such as infrastructure and housing bonds, saving certificates, ULIP's post office, time deposits and mutual funds

The taxpayer has an option to invest in infrastructure and housing bonds, National Saving Certificates (NSC), unit-linked insurance plans (ULIP) or deposits with banks and post offices. All of these investments provide an assured fixed return on investments. These investments are long term with a lock-in period varying between 3-5 years. In case of daughters, parents can invest in Sukanya Samrudhi Yojana which is rolled out by the Government for the girl child. While such investments provide the taxpayer a deduction in his taxable income, the investee companies are provided with large amount of funds for a fixed duration. In few cases like deposits with post office where the taxpayer withdraws the investment prematurely, the deduction under section 80C would get reversed and hence this deters the taxpayer from premature withdrawals. Investment in equity based mutual funds is also an option whereby there is a lock-in of 3 years.

Contribution to approved provident fund (public and recognised), pension funds and superannuation funds

The objective of contribution to provident fund/pension/ superannuation fund is to provide for old age, post retirement. Taxpayers seeking such coverages have a wide range of options. While most employers would mandatorily cover employees for provident fund, a few have superannuation fund also. In addition to this, the employees have a further option of securing their old age through contributions to Public Provident Fund (PPF) and investing in pension schemes of private players. Withdrawal from approved provident fund is exempt if the employee has been in continuous service for 5 years. Similarly PPF withdrawals are also not taxable but have a lock-in period of 15 years. Receipts from superannuation can be exempt (subject to conditions) and these can also be invested into annuity plans to earn pension. The pension received would be taxable.

Other options for taxpayers to avail a deduction under section 80C would be life insurance premiums, tuition fees towards education and principal repayment on housing loan, stamp duty and registration fees for house etc.

As can be observed, 80C offers a win-win to both the taxpayer as well as the government. While the taxpayer is assured for future financial security, the government and the industry at large is assured of investments at a reasonable rate. With a lock-in for investments, the investee company is not burdened with an obligation of sudden repayments and can route the money to projects that have longer gestation periods. While for bonds and fixed deposits, interest may be required to be paid quarterly, many of the schemes like NSC, fixed deposits have option of re-investing the interest which helps the investee company.

Considering the spiralling cost of living and the reducing returns, the Finance Minister should increase the limits under section 80C which would boost investments.


Information for the editor for reference purposes only

Aarti Raote is Partner with Deloitte India.

Reena Poddar, is Manager with Deloitte Haskins and Sells LLP.