Number of schemes under 80C should be reduced

The common investment section of I-T Act is too crowded and the limit for taxpayers is too low to enjoy benefits

For software professional Ajay Kumar, 70 per cent of the Rs 1 lakh limit provided under section 80C of the Income Tax (I-T) Act is covered by his contribution to the Employees’ Provident Fund (EPF). He also contributes (Rs 15,000-20,000) to the Public Provident Fund (PPF) and invests the remaining Rs 15,000-20,000 in bank deposits or an equity-linked savings scheme (ELSS). Kumar feels if the government increases the section 80C limit to Rs 2 lakh, it will help him on the tax deduction front.

Kumar’s case isn’t an isolated one. Chartered accountant Parizad Sirwalla says this is what most of those in the highest tax bracket of 30 per cent feel. She, therefore, feels there is a case to raise the section 80C limit and decongest it.

Experts say 95 per cent of taxpayers’ investments are in five-six instruments of section 80C — EPF, PPF, life insurance, principal repayment of housing loans, fixed deposit and ELSS. “Section 80C is a combination of deductions for investment and expenditure. Given one can invest up to Rs 1 lakh each in EPF and PPF, deductions such as those for premium payment towards a life insurance policy, children’s education and principal repayment of housing loan can be carved out of section 80C because these are important investment/expenditure and most taxpayers put money in these,” Sirwalla says.

Amarpal Singh Chadha, tax partner at EY, agrees. “There are too many deductions listed under section 80C and this has to be rationalised. Also, the savings slab might be increased,” he says. However, some believe removing certain saving instruments from section 80C and moving to a separate section might mean forcing smaller taxpayers (especially those in the Rs 2-5 lakh bracket) to invest in as many instruments as possible, clearly a negative.

Rajesh Srinivasan, partner at Deloitte, Haskins and Sells LLP, isn’t in favour of decongesting section 80C. “Too many components under section 80C provide the flexibility to invest or spend on something that is required or wanted (in the investment portfolio). And, say one can’t invest, he/she has the option of claiming for expenditure and vice versa,” he says.

But Chadha differs. “Just because investments in PPF and the maturity amount are exempt from tax, taxpayers invest in it despite it having a lock-in of 15 years. Therefore, if you give a deduction that isn’t running in section 80C but is exempt from tax and forces individual to invest, they will invest. To prevent abuse of this, an investment cap could be attached. In a country such as ours, forced saving will be helpful,” he says, adding five to six instruments should be kept under section 80C, the rest separated.

Separating instruments such as the National Pension System (NPS) might help boost retirement savings. Contribution towards NPS (tier-I) qualifies for deduction of up to Rs 1 lakh under section 80CCD. But one can claim a deduction of up to Rs 1 lakh under sections 80C, 80CCD and 80CCC together.

 

Vaibhav Sankla, director of tax consultancy H&R Block says at least some instruments should be done away with. Like Post Office's Time Deposit, Nabard bonds, deferred annuity contracts, pension funds and so on.