Budget 2018: Why Section 80C is in urgent need of overhaul; one size does not fit all

Section 80C of the Income Tax Act is in urgent need of overhaul. As it is, it confers a deduction from one’s gross total income of Rs 1.50 lakh in the maximum if investments/savings are made in the prescribed avenues. It is a one-size-fits-all dispensation, as it is. It should be freed of its straightjacket by the forthcoming Union Budget 2018 coming up on 1 February 2018 in the following manner:

1) Our senior citizens do not figure in the dispensation at all. There is no avenue tailor-made for them. There is no life insurance available at this stage of their life living on their own and their ageing spouses. There is no expenses incurred on higher education or EMI (principal part) on home loan, given the fact most of them would have already discharged these duties while in their prime. Why then not allow them to accumulate their and their spouses’ medical bills and claim it as deduction maybe up to the general ceiling of Rs 1.5 lakh?

Geriatric medicare is the most expensive and old age throws up more than its quota of health-related issues. Youngsters may not be able to support them even if they want to. The government smugly looks the other way saying that for senior citizens an extra 50,000 tax-free limit is available and for very senior citizens there is no tax on the first Rs 5 lakh of their income. The only senior citizen-specific provision in section 80C can be health-related.

Representational image. News18

Representational image. News18

Health insurance premium under section 80D obsesses over hospitalisation whereas senior citizens have to routinely pop-up diabetic and high blood pressure medicines twice a day

2) The overall limit of Rs 1.5 lakh is too small for the well-heeled and deep-pocketed. Why not encourage savings for infrastructure development and other noble national causes by loosening the strings of section 80C? Let 100 percent deduction be conferred on the first Rs 1.5 lakh of savings/investments under section 80C and thereafter let the percentage tapers off.

To wit, why not allow 95 percent deduction on the next Rs 2 lakh and 90 percent on the next Rs 2 lakh and so on till tax-oriented savings/investments becomes unattractive which might be the case if one is called upon to save Rs 2 lakh only to beget a deduction of Rs 10,000. The point is the one having greater willingness and capacity to save should not be discouraged.

3) Let the lock-in period be a heightened seven years. As it is one can place upto Rs 1.5 lakh in tax-savings fixed deposits with banks with a lock-in period of five years. Heightened tax savings should be allowed with a heightened lock-in period. That would be poetic justice.

4) Let the returns on tax-oriented investments be not more than the savings bank interest because with tax savings shield thrown in, the returns works out much higher. To wit, a return on a seven year infrastructure bond of 4 percent per annum translates to 5.2 percent post-tax assuming a 30 percent marginal rate of tax.

There is a definite trade-off between tax collected and funds garnered. If high net worth individuals (HNI) are prepared to shoulder greater burden in terms of amount coughed up, heightened lock-in period and lower interest, the government should not cavil at their desire.
The liquidity thus mopped up also would result in lower inflation given the fact that inflation is also a function of money in circulation.

Net-net, the Narendera Modi government, indeed no government has anything to lose from this seeming largesse to the rich. Actually, it is not at all largesse to the rich but only confiscation, so to speak, of their idle funds for a larger national cause.

For full coverage of Union Budget 2018 click here.


Updated Date: Jan 22, 2018 12:52 PM

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