Why may the cap on tax-saving deductions under section 80C be increased in Budget 2022?

Many people rely on the section 80C advantage to save money on taxes. The highest deduction allowable under section 80C of the Income-tax Act of 1961 was Rs 1 lakh per year until FY2013-14.

The ceiling was thereafter raised to Rs 1.5 lakh per year in FY2014-15. The limit has stayed unchanged since then, i.e. for the past seven years. Many people’s expenses have increased, and their earnings have climbed, but the section 80C benefit has not.

As a result, many people quickly reach their limit. As a result, raising the limit under section 80C is nearly always on the wish list of taxpayers prior to the annual budget.

With the pandemic and rising inflation in view, the government should raise the section 80C ceiling to at least Rs 2.5 lakh per year in the Union Budget of 2022. Here’s how doing so will benefit not only the regular taxpayer, but also the government.

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What is the section 80C benefit?

Individuals and Hindu Undivided Families are the only ones eligible for the deduction under section 80C. (HUFs). It is the most commonly used part for tax savings. A person can claim a deduction under section 80C only if they invest in certain savings plans or suffer certain expenses that are stated there. The taxpayer is permitted to invest in one or more savings products up to a limit of Rs 1.5 lakh in total deductions. The threshold limit is calculated by taking into account all qualifying investments made before the end of the financial year for which a deduction is sought.

The following are the main tax-saving options available when claiming a deduction under section 80C:
  • Payment of a life insurance premium
  • Public Provident Fund Contributions
  • Employee Provident Fund and Voluntary Provident Fund contributions
  • Repayment of the principal on a home loan
  • For the purchase of a home, stamp duty and registration fees were paid.
  • ELSS or tax-advantaged mutual funds investments
  • Sukanya Samriddhi Account Scheme Investments
  • Children’s tuition fees
  • 5-year tax-saving bank or postal fixed deposit investments
  • Investing in the Senior Citizen Savings Plan

Why should the Section 80C cap be raised?

After subtracting the allowable section 80C deduction amount from an individual’s gross total income, the taxable income is calculated. As a result, any increase or decrease in the section 80C deduction limit has a direct impact on taxable income and, as a result, on an individual’s tax burden.

The increase in the section 80C deduction limit serves a number of purposes:

Individual taxpayers should consider the following:

  • It lowers the tax burden on individuals.
  • It assists individuals in saving for financial objectives such as retirement, children’s education, and so on.
  • Aids in the purchasing of a home
  • It gives them a feeling of security.

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In terms of the government:

  • It encourages households to save more and keeps inflation under control.
  • It aids in the channelling of long-term money to specialised areas such as infrastructure, among other things.
  • It offers the government with low-cost funds.
  • It stimulates particular businesses, like as housing, which is a key source of employment.
  • Aids in the achievement of social objectives (Sukanya Samriddhi Scheme), such as girl child education and marriage.

As previously stated, the deduction under section 80C was last increased to Rs 1.5 lakh in FY 2014-15. Meanwhile, the cost of living has risen significantly, which has been exacerbated by the pandemic’s negative impact. As a result, the current cap of Rs 1.5 lakh needs to be reconsidered, with a minimum increase to Rs 2.5 lakh in Budget 2022. This will also assist the government in achieving its ‘Ease of Living’ aim and will assist individual taxpayers in reducing their tax burden.