Rajan favours raising savings limit beyond Rs 1.5 lakh for tax benefits

Says RBI would like to see quality fiscal consolidation with a shift to capital spending rather than on mistargeted subsidies

Days ahead of the Budget, Reserve Bank Governor Raghuram Rajan today pitched for increasing the tax exemption limit on financial investments by individuals from Rs 1.5 lakh a year.

Acknowledging that there was a Rs 50,000 increase in the limit in the last budget to Rs 1.5 lakh a year, he said benefits of this instrument have been lost over time as the limit was anchored at Rs 1 lakh for a long time.

"Remember the government increased the limit for tax benefit in savings by Rs 50,000 in the last budget. The question is -- is there room for more primarily because the real tax benefit has fallen over time because the limit was at Rs 1 lakh for a long time. Maybe what we have to do is increase that," Rajan said on a call with analysts.

Investments of up to Rs 1.5 lakh in Public Provident Fund, Provident Fund, New Pension Scheme, insurance policies and equity-linked saving schemes is deducted from the taxable income under Sec 80 C. This helps in financial savings.

It can be noted that the national savings rate has dipped to the 30 per cent level from a high of over 36.9 per cent in FY 2008.

Finance Minister Arun Jaitley, who increased the limit to Rs 1.5 lakh in his July 2014 budget, will be presenting the first full fiscal budget of the new Government on February 28.

Rajan said also that the RBI would like to see quality fiscal consolidation with a shift to capital spending rather than on mistargeted subsidies.

"A movement of spending from mistargeted or poorly targeted subsidies towards more capital investment would be a good move," he said, clarifying that the RBI is not against subsidies and there are sections which need to be given the benefits.

He said such a shift in spending will also help in inflation management as the supply side constraints will be removed with capital spending by the government.

The RBI had yesterday linked the future course of its policy action to fiscal consolidation.