How Section 80C of the IT Act keeps pace with inflation

“When I claimed deduction under 80C for the first time nine years ago, my children’s tuition fees were 22,000. Inflation has increased the fees five times, but the investment limit under section 80C remains unchanged,” he said.

Chahar is right. The last time the 80C limit was increased in 2014- from from 1 lakh 1.5 lakhs. The increase itself came after nine years but it was not in line with inflation. The Cost Inflation Index (CII) saw an increase of 105% between 2005 and 2014 while the 80C investment limit increased by only 50%.

“I hope the government will at least raise the limit 2.5 lakh,” Chahar said. The Institute of Chartered Accountants of India (ICAI) in its Pre-Budget Memorandum 2023 has also suggested that the deduction limit under section 80C be increased. 2.5 lakhs. ICAI said that the hike would provide savings opportunities to the taxpayers, which was also the basic idea behind the introduction of section 80C.

Sujit Bangar, Founder, Taxbuddy.com said, “Section 80C was introduced in 1968 with the objective of providing tax relief to individuals and Hindu Undivided Families (HUFs) by way of provision of deduction for specified investments and expenses from their gross total income.” went.” After several amendments over the years, 80C in its current form was introduced in 2005 by the then Finance Minister P. Chidambaram.

“… it is necessary to encourage savings, and tax relief is one way of inducing people to save. Furthermore, I feel that the State should be neutral between one form of savings over the other, and Should allow the taxpayer more flexibility in making savings/investment decisions. For all these reasons, I propose to allow each taxpayer a consolidated limit, in addition to the basic exemption limit 1 lakh for savings which will be deducted from income before computing tax,” Chidambaram said in his speech.

But, the current limit of 1.5 lakh is insufficient as the value of the investment has depreciated over the years due to inflation. Therefore, a major expense, such as registration fee and stamp duty for house purchase or children’s tuition fees, can take up the entire expense. 1.5 lakh limit in a financial year.

Kalpesh Ashar, Founder, Full Circle Financial Planners & Advisors, and a SEBI Registered Investment Advisor (RIA), said that for high income earners, mandatory provident fund (PF) contribution alone maxes out the 80C limit and There is no scope for making additions. Investments for tax-saving purposes.

Such is the case of Preeti Grover Mahajan, a resident of Mumbai. His contribution to Public Provident Fund (PPF) and Employees’ Provident Fund (EPF) in a financial year is approx. 1.5 lakhs. She used to claim deduction on investments made in Equity Linked Savings Scheme (ELSS) in the past, but over the years, with increase in her income and increase in EPF contribution, ELSS is no longer a part of her 80C scheme. Mahajan’s term plan premium is also eligible for 80C deduction, but he is unable to utilize the same.

“For high income earners, A roof of 1.5 lakh is a drop in the ocean. Most of them are taxable to me even though I have made large investments. Investment limit under section 80C can be increased up to 3 lakh,” said Mahajan, 40.

There has been a demand for a long time to remove section 80C and allow a separate deduction for certain essential expenses like premium paid for life insurance policies. “We recommend our customers to buy pure term insurance irrespective of whether they are able to claim deductions on it or not. Ashar said, tax exemption on term plans through separate deductions in case of medical insurance premium will encourage people to buy it.

A consolidated limit covering most major savings options and expenses under Section 80C was introduced only in 2005, before which separate deductions were available with different limits on ELSS funds and pension plans, among other options.

Over the years, the income tax laws have clubbed most of the major savings options and expenses under the single cap of Section 80C. Not so in most other countries (see graphic), For example, in the US, contributions of up to $6,000 to an Individual Retirement Account ( 4.9 lakh) is deductible. In addition, taxpayers can opt for the flat standard deduction which is limited to $12,550 ( 10.25 lakh) up to $25,100 and the full deduction on certain expenses, including interest expense for medical expenses, home mortgage and investments, charitable contributions and gambling losses.

Similarly, in Japan, a separate tax deduction of 40,000 yen ( 25,120) each is offered for life insurance premiums, pension premiums and nursing care insurance premiums, and up to 50,000 yen for earthquake insurance contracts. Social insurance premiums are fully deductible in Japan.