Though we have a lot of options for investments and one expense item (school fees) too, the limit to which the tax benefit can be got is only Rs.1 L. The investments can be in any proportion and there is no minimum amount that needs to be shown.In case the tax payer has invested cumulatively say Rs.1.35 L and earns Rs.5 L per year. The taxable income will be reduced only to the extent of Rs.1 L and will be assessed at Rs.4 L.
A case study on why the Rs.1L limit for 80C is ridiculously low and impractical.
There are a number of approved methods to reduce out tax outflow. The major among them, for salaried employees, is the provision under Section 80C of the Income tax Act. Before getting into the case study we need to get a better understanding of Section 80C.
Benefits of 80C
Sec 80C provides for reduction in taxable income upto Rs.1L/- if certain investments or expenses are made. There are a good set of benefits from this section
1. Taxable income itself reduces. For a person earning Rs.2.5L, an investment of Rs.1 L will bring him below the taxable income bracket. For women, the income can be as high as Rs.2.8 L before they pay tax if they use Sec 80C to the full limit.
2. Forced Savings Habit. Sec 80C will ensure that some amount is saved every year for future use.’
3. Easy Access to 80C instruments. The investment options that are covered under Sec 80C can be accessed and availed very easily.
The Options Under 80C
The items that are included in Section 80C, which are available in the market currently are as follows:
1. EPF (Employees Provident Fund) upto 12% of the basic salary
2. School Fees for Children (No sub limits. Only school tuition fee is acceptable. Transport, special fees, private tuition, etc cannot be included)
3. Life Insurance Premium (only if the premium is less than 20% of the sum insured; in other words life cover has to be atleast 5 times the premium). This includes ULIPs (Unit Linked Insurance Plans) and traditional plans from all insurance companies. No sub limits.
4. Pension Plan Premium without any sub limits. This was earlier under Section 80CCC with a sub limit of Rs.10,000/-. 80CCC has now been merged into 80C itself.
5. Housing loan Principal without sub limit. The interest comes under a section24 with a limit of Rs.1.5 L.
6.Equity Linked Savings Scheme (ELSS) Mutual Fund schemes. No sub limits
7. 5 years Tax Saving Bank Deposits. No sub limits.
8. National Savings Scheme Certificates. No sub limits.
9. Public Provident Fund (PPF). The limit is Rs.70,000/- per person per year. Investments in children’s names will also be included in the limit for the parents.
Limit of Rs.1L
Though we have a lot of options for investments and one expense item (school fees) too, the limit to which the tax benefit can be got is only Rs.1 L. The investments can be in any proportion and there is no minimum amount that needs to be shown.In case the tax payer has invested cumulatively say Rs.1.35 L and earns Rs.5 L per year. The taxable income will be reduced only to the extent of Rs.1 L and will be assessed at Rs.4 L.
Limit Not Enough
The limit may be enough for those who have income in the less than Rs.3L category. Once the income is more than Rs.3L per year (Rs.25,000/- per month), the benefit of this section is on a reducing scale.Let us see an example of an actual salary slip of Mr.Ramesh* (*Name changed for protecting privacy). He is a sole earning member of the family, working as a finance executive in a BPO company. He is married with 2 children in school.
The section 80C limit as seen in the example is quickly exhausted. In another scenario, for a person earning Rs.50,000 per month, the EPF alone may cover as much as Rs.30,000 out of the available Rs.1L.
Need to Increase 80C Limits
One of the requests from the salaried classes to the Honorable Finance Minister has been to increase the Section 80C limit to Rs.2.5L in the forth coming budget. The increased limits can bring in much required investments to build our nation’s infrastructure. This will benefit the country more than the actual tax received as the quantum of investment through such investments will be atleast 3 times more than the tax received (at the 33.3% income tax slab).
To save tax Mr.Ramesh (10% income slab)has invested Rs.1 L. If he has paid tax till March, it would have been only Rs.15,450/- (10% of income between Rs.150,000/- and Rs.300,000/- plus Educational cess).
In a few days more, we will get to know whether our wishes have been granted.
There is no rationale for having 80C benefits or other savings-related tax benefits. Rather all these exemptions should go – there should be a flat tax rate on the total income earned. Whether an individual wants to save or not, should be left to his discretion. In fact, governmet is in trouble for encouraging forceful saving habit. All the instruments such as NSC, PPF have higher interest rates. When these exemptions on small savings schemes go, there will be no binding on givernment to provide higher interest rate. Therefore, there should not be any investment-related tax breaks.
kamesh, must be a class of citizens , how have trouble saving for a rainy day and then starts feeling insure about others saving for a rainy day , even now nobody is forcing him to save , neither ELSS or ULIPS are funded by the government
There is no socal security in India which forces people to save for rainy days. The household saving is also the cheapest form of getting money for infrastructure development. Saving should be encouraged by Government, therefore there should be higher IT exemption for 80C. however there should not be any tax exemption for senior citizen as they have no rationale to save money. but their IT exemption should be increased by Rs. 2.5 lakhs. Let the Government allow senior citizen to enjoy their old age peacefully
It is time for India to move onto Expenditure taxes as against Income taxes. Thus, Income taxes could be brought down to lets say 10% levels, while expenditure taxes could be increased to 20%+ levels. In any case, all these deductions only tend to make tax returns and filing complex. These should all be scrapped in favour of reducing tax rates.
Under amend of PF sheme 2008 for international employee, some of foreigner need to pay double income tax since in section 80c limited Rs. 1L. All of them force by indian law to deposit PF in rate 12% of their total salary ( no limit of 6500 as indian employss ). This will be more than 1L of PF Deposit in a year. Evenmore when the foreigner leave the country they force to pay income tax on their total refund amount again.
The example is not matching with the requirement of 1L ceiling getting raised.
Because, as this person has a housing loan repayment of 8600, which makes the interest repaid as 73600 (after principal portion of 29600), he has no tax to pay. (First 1.5L exempt, then 1L 80C and balance 0.5L covered by this hsg loan interest). So for such a person, this 1L cceiling does not do any harm.
Try to put another example, with a higher salary.
There is no rationale for having 80C benefits or other savings-related tax benefits. Rather all these exemptions should go – there should be a flat tax rate on the total income earned. Whether an individual wants to save or not, should be left to his discretion. In fact, governmet is in troublee. Therefore, there should not be any income-related tax breaks