ⓘ Image credits: Disha Sheta, pexels.com
The Central government is reportedly considering a proposal to create a new segment in its tax-saving products under Section 80C of the Income Tax Act. This new plan is expected to be announced in the upcoming Union Budget 2020 to provide tax exemption for investment of up to INR 50,000 in National Savings Certificates (NSC). The ministry is also considering to allow a maximum investment limit of INR 2.5 lakh for Public Provident Fund (PPF) investors.
“A proposal to allow tax incentives on the small savings scheme, especially PPF and NSC, is with the finance ministry. If given a go ahead, these would be part of the budget announcement,”
“These fiscal incentives would put more money in the hands of the savers.”
– Said an official familiar with the matter to ET
At present, there is an exemption of INR 1.5 lakh under the section 80C of the IT Act, which includes investments made to the PPF account and NSC.
The saving rate of India’s household sector has fallen from 17.2 percent in 2017-18 compared to 23.6 percent in 2011-12.
Since 2011-12, household savings in financial assets has yielded 7 percent of GDP. Bank deposits standing at 27 percent account for the biggest share in the total gross financial savings of households.
According to experts, increasing the Section 80C limit will put more money in the hands of people and help boost the falling savings rate of India households.
Gautam Mehra, leader, tax and regulatory services, PwC India told ET…
“The potential increased savings arising on account of an increase in the limit of PPF by Rs 1 lakh from Rs 1.5 lakh to Rs 2.5 lakh is immense if we consider that there could be over 3 crore individual taxpayers having a gross total income of Rs 5 lakh or more. Compared to other measures around providing tax relief, this one has the advantage of garnering significant personal savings,”
“Also, a step like this could go be crucial at a time when India’s savings are going down,” he said.
As said by the Financial express yesterday, deposits up to INR 1.5 lakh in NSC qualifies for deduction under Section 80C. However, all taxpayers can’t exhaust the Section 80C limit by depositing in NSC only. Most of the taxpayers are salaried individuals. Their contributions towards Provident Fund and Life Insurance Policy are also counted for claiming Section 80C benefit. So, if the government creates a separate segment to allow tax exemptions up to Rs 50,000, NSC will likely become a compelling option for taxpayers to save more for several reasons:
- The maturity period of NSC is five years. For the tax-saving purpose, another five-year option for common taxpayers is five-year tax-saving fixed deposit scheme offered by the banks and post office. If there is a separate segment for NSC under Section 80C, tax-payers will be more likely to invest into this scheme.
- NSC is currently offering a better interest rate than five-year fixed deposits of banks and post office.
- NSC comes with a sovereign guarantee while Bank fixed deposits don’t enjoy this benefit.
Experts believe that raising Section 80C limit and rationalising tax slab will put more money in the hands of people, allowing taxpayers to save more, and also boost India’s falling household savings.
Divya Baweja, Partner Deloitte Haskins & Sells LLP, told the Financial Express…
“Section 80C limit today is Rs 1.5 lakh. It has been there for years. There has always been a demand that this number should go up,”
“Looking at the whole circle of economy, there are two objectives the government should want to achieve. First, ensure there is more money in the market. Second, at the same time to ensure people start saving more. To achieve these, a rejig in 80C limit and change in tax-slab are required.” – Baweja added