To give some relief to common man battling rising prices, finance minister Pranab Mukherjee is expected to raise the exemption limit on annual savings of an individual in the upcoming Budget. The savings exemptions may be raised in the Union Budget 2011-12 from the present Rs 1 lakh. In 2010-11, the finance ministry allowed an additional exemption of Rs 20,000 for investment in long-term infrastructure bonds.
Mukherjee is expected to raise the Rs 1 lakh exemption limit by another Rs 20,000 in the Union Budget in February, a Cabinet minister told FE. Besides pushing up the savings rate, this would align the current income tax regime towards the proposed Direct Taxes Code (DTC).
“This year is going to be an year of consolidation towards DTC,” a top official in the finance ministry had said recently. In the DTC, the government has proposed tax exemption on annual savings of up to Rs 1.5 lakh.
The tax exemptions for savings is received under section 80 C of the Income Tax Act while the special window of Rs 20,000 investment in infrastructure bonds is available under section 80CCF. The tax exemption for savings limit of Rs 1 lakh when increased, will give an additional cushion to the common man who is grappling with price rise already. Tax experts also feel that there is a case for to raising the savings exemptions limit as the current exemption was prescribed long back. Last year, Planning Commission had suggested to the finance ministry that savings exemption limit can be raised to Rs 1.5 lakh.
“The deduction under section 80CC of Rs 1 lakh was prescribed long back. Keeping in view the fact that there are very limited exemptions to deductions available to a common taxpayer. It makes a strong case to increase the level under section 80C to provide some tax relief and also increase potential for long term retiral savings,” said Vikas Vasal from KPMG.
The savings of Indian households was Rs 7,34,653 crore in 2007-08, of which over 55%, or Rs 4,06,630 crore, is in bank deposits, according to the latest RBI figures. Bank deposits as defined by RBI, includes cooperative and non-credit societies. There has been a consistent shift in household savings away from physical assets towards financial assets.