Budget 2020: Analysing Individual Tax Savings And Investment

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Budget 2020: Analysing Individual Tax Savings And Investment

Union Budget 2020 is almost knocking at the door. Its all set to be presented on Saturday, February 1, by Finance Minister Nirmala Sitharaman. With rising cost of living, inflation and dipping savings, there is heightened expectation amongst individuals that the much-awaited Budget 2020 would propose adequate measures to increase their disposable income not only to meet their consumption requirements but also enable them to plan for future savings in a planned manner.

Section 80C covers a range of tax-saving avenues, primarily fixed income products such as bank fixed deposits and post office savings schemes, contributions to provident fund (PF) and public provident fund (PPF) or National Savings Certificates (NSC).The deduction allowed under Section 80C (presently restricted to Rs. 1.5 lakh) is the most important means to save tax for an individual taxpayer. This limit was last raised in Budget 2014. It has been almost six years since then. Further, the limit of Rs 1.5 lakh is typically exhausted through PF contributions, life insurance premium and payment of housing loan principal. This leaves minimal scope for investments in the aforementioned fixed income products.

The limit of Rs 1.5 lakh can be raised to Rs 2.5 lakh, which will provide an impetus to taxpayers to invest in financial assets. Further, the government can also consider carving out a separate deduction for income products such as PPF and NSC.

Apart from deduction under Section 80C, another investment option, where a taxpayer can claim additional deduction is the National Pension Scheme (NPS) a defined contribution- based pension system. At present, self-contribution towards NPS is allowed as deduction up to Rs 50,000 under Section 80CCD(1B) for those who have exhausted the deduction limit of Rs1.5 lakh. This additional benefit is given to no other tax-saving instrument and is exclusively available for NPS. To make it more attractive, the government could consider raising the limit of Rs 50,000 to Rs1 lakh. Further, government employees are allowed a deduction of 14 per cent of basic pay with respect to employer’s contribution towards NPS. However, this very limit has been restricted at 10 per cent of basic pay for private sector employees, which should also be raised to 14 per cent to bring them at par with their government counterparts. Such defined measures will make NPS an attractive retirement scheme and enable the government to realise its vision of creating a pensionable society.

Owning or holding a residential property is an important asset in an individual’s portfolio. Due to soaring property prices, in most cases, he or she typically tends to finance the property through home or housing loans. This very home loan can help the individual access tax relief by setting-off the interest cost against income from the residential property. The existing set-off limit is restricted to Rs 2 lakh. Enhancement of this set-off limit will reduce the tax outflow for an individual as well as boost investment in the real estate sector.

Apart from the above, since robust infrastructure is one of the key drivers of an economy, authorities should look at reintroducing the deduction for investment in infrastructure bonds. This was earlier introduced in April 2011 with a maximum deduction of Rs 100,000 and discontinued a year later. Thus, such deduction should not only be reintroduced but the limit of RS 100,000 should be enhanced to Rs 150,000, if not Rs 200,000.

The above measures will not only help individuals in focusing on savings and investment, but will also entail long-term benefits for the economy.

Poorva Prakash is Senior Director, Deloitte India

Anurag Jain is Senior Manager; and Shubham Goel is Deputy Manager with Deloitte Haskins and Sells LLP

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