“When I claimed deductions under 80C for the first time nine years back, my children’s tuition fee was ₹22,000. Inflation has pushed up the fees by five times but the investment limit under section 80C has remained unchanged," he said.
Chahar is right. The last time the 80C limit was increased was in 2014— from ₹1 lakh to ₹1.5 lakh. This hike 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 whereas the 80C investment limit was increased by a mere 50%.
“I hope the government increases the limit to at least ₹2.5 lakh," said Chahar. 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 to ₹2.5 lakh. ICAI said the hike will provide savings opportunities to taxpayers, which was also the original thought behind introducing section 80C.
“Section 80C was introduced in 1968 with the purpose of allowing tax relief to individuals and Hindu Undivided Families (HUFs) through the provision of deductions from their gross total income for specified investments and expenses," said Sujit Bangar, founder of Taxbuddy.com. After several modifications over the years, 80C in its current form was introduced in 2005 by then finance minister P. Chidambaram.
“...it is necessary to encourage savings, and tax relief is a method to induce people to save. Further, I think that the State must be neutral between one form of saving and another, and allow the taxpayer greater flexibility in making savings/investment decisions. For all these reasons, in addition to the basic exemption limits, I propose to allow every taxpayer a consolidated limit of ₹1 lakh for savings which will be deducted from the income before tax is calculated," Chidambaram said in his speech.
But, the current limit of ₹1.5 lakh is inadequate given that the value of investments has decreased over the years due to inflation. So, a big expenditure, such as registration fee and stamp duty towards a home purchase or children’s tuition fees, can take up the entire ₹1.5 lakh limit in a financial year.
Kalpesh Ashar, founder, Full Circle Financial Planners and Advisors, and a Sebi Registered Investment Advisor (RIA), said for high-income earners, mandatory provident fund (PF) contributions alone max out the 80C limit and there is no scope to make additional investments for the purpose of tax-saving.
Mumbai-based Preeti Grover Mahajan’s is a case in point. Her contributions in public provident fund (PPF) and employees provident fund (EPF) in a financial year totals up to about ₹1.5 lakh. She used to claim deduction on investment made in Equity Linked Savings Scheme (ELSS) in the past, but over the years, with increase in her income and simultaneous increase in EPF contribution, ELSS no longer forms a part of her 80C plan. Mahajan’s term plan premiums also qualify for 80C deduction, but she is unable to utilize that as well.
“For high income earners, the ₹1.5 lakh ceiling is a drop in the ocean. Despite making large investments, most of them remain taxable for me. The investment limit under section 80C can be increased to ₹3 lakh," said 40-year-old Mahajan.
There has also been a long standing demand to declutter section 80C and allow separate deductions for some essential expenses, such as the premium payments for life insurance policies. “We advise our clients to buy pure term insurance irrespective of whether they are able to claim a deduction on it or not. Offering tax sops on term plans through separate deduction, as is the case with medical insurance premium, will encourage people to buy it," said Ashar.
A consolidated limit by combining most major savings options and expenses under section 80C was introduced only in 2005, prior to which separate deductions with different limits were available on ELSS funds and pension plans, among other options.
Over the years, income tax laws have combined most major savings options and expenses under a single ceiling of section 80C. This is not the case in most other countries (see graphic). For instance, in the US, contributions to an individual retirement account of up to $6,000 ( ₹4.9 lakh) is deductible. Over and above this, taxpayers can opt for flat standard deduction that ranges from $12,550 ( ₹10.25 lakh) to $25,100 and full deduction on certain expenditure, including medical expenses, interest expenses towards home mortgage and investments, charitable contributions and gambling losses.
Similarly, in Japan, separate tax deductions of 40,000 yen ( ₹25,120) each are offered on life insurance premium, pension premium and nursing care insurance premium and up to 50,000 yen for earthquake insurance contracts. Social insurance premiums are fully deductible in Japan.
