Why The 80C Limit Warrants A Relook In The Union Budget 2018

Much has been said and written about the need to rationalise tax brackets further. Last year, the FinMin reduced the tax outgo for the 2.5 lakhs to 5 lakhs tax bracket from 10% to 5%, and threw in a rebate for those earning up to Rs. 3.5 Lakhs – essentially exempting those earning up to Rs. 25,000 per month from any direct taxes. This year, predictions of further goodies are rampant – especially with 5 states going to vote in 2018, and with the upcoming 2019 elections close at hand.
In my view, a tax cut, if it does materialise, definitely needs to be accompanied with a sizeable increase in the Section 80 C limit, which currently stands at Rs. 1.5 Lakhs. The last increase in this limit was seen in the fiscal 2014-15, when it was hiked from Rs. 1 Lakh. It’s high time that the FinMin considers increasing the limit further, to at least Rs. 2.5 Lakhs, for the next fiscal. Here’s why.

First, it’s a fact that a very large part of the annual savings that most people make towards their retirement is ‘forced’ using tax savings as a hook. Given that we can quite clearly see the beginnings of an impending retirement crisis for millenials a few years hence, the government would be making a wise, forward thinking move by encouraging a higher quantum of long-term saving towards the worthy goal of building rubust retirement corpuses.

Second, it’s a fact that three avenues – namely, home loan EMI’s, EPF contributions, and LIC premiums consume a very large portfolio of the Section 80C allocation for most middle-income individuals. Consider an IT professional earning Rs. 10 Lakhs per annum and running a home loan of 40 Lakhs (an EMI of roughly Rs. 35,000). Even in the first year of his home loan, his principal component will be around Rs. 80,000 (this is deductible under Section 80C). Couple that with the Rs. 50,000 or so of his annual EPF contributions, and a typical number of Rs. 20,000 or so being funnelled into low yielding endowment insurance plans, and it leaves him with no incentive to invest any more money to save taxes! The worst part is, that none of the three avenues described previously are seriously value creating in terms of long term retirement planning.

Third, considering the fact that India has a very poor life insurance penetration number, a higher Section 80C limit may drive more people to take up pure risk ‘term plans’, that will act as their family’s first line of defence against financial strife, in the unfortunate event of their loss of life.

Fourth, hiking the Section 80C limit may actually incentivise more individuals to take up home loans and buy residential real estate, resulting in a much-needed mop-up of the still burgeoning levels of unsold inventory in most urban areas of the country.

So, there you have it. There are four very valid arguments in favour of increasing the Section 80C limit this year. Let’s hope the FinMin takes note!