Proposal to discontinue exemption under Section 80 C

Proposal to discontinue exemption of Rs. 1.5 lakh available for Savings under Section 80 C

Proposal to discontinue Section 80 Exemption It is learnt that Finance Ministry is considering to put up a proposal for discontinuing Exemption of Rs. 1.5 lakh presently available under Section 80C for Savings and Insurnace such as premium paid, investment in NSS, Mutual funds, Pension funds etc. Alternatively, the basic income tax exemption limit of Rs. 2.5 lakh would be raised to Rs. 4 lakh. Reasons behind such a bold move by Finance Ministry as per sources are:

1. Income Tax Department could not verify whether the Investments declared to be have been made to avail exemption under Section 80 C were actually made

2. To make Income Tax Law simple by raising basic Income Tax Exemption Limit and avoid complexities involved in providing Income Tax Exemption to promote savings.

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As per Finance Ministry proposals, the current system allows individuals to avail of the Section 80C benefit without having made the required investments.

Most of the tax returns by individuals are processed by what is called a ‘summary assessment’, under which an adjustment in the reported income is made only in cases of arithmetic error or of a wrong claim that is apparent from the return filed. Officials do not ask questions or insist on proof of investment while processing returns. Only in cases of ‘scrutiny assessment’ and ‘assessment of income that has earlier escaped assessment’, which are done in very few cases, more information or evidence is sought to ensure that the reported income is correct.

Even in the case of salaried individuals, where the employer may insist on proof of investments, the tax authorities do not. Besides, if a salaried individual wrongly claims in his return that Section 80C investments have been made, the TDS by the employer and paid to the department is refunded by the tax authorities without asking any questions. In the case of self-employed, there is no check either by the employer or the taxman.
So the ministry feels that any individual who is actually interested in saving would anyway do it and there is really no need to incentivise the same through the tax policy.

Savings entitled to tax benefit under Section 80C include payments towards life insurance, deferred annuity, provident funds, National Savings Certificates, unit-linked investment plans of LIC Mutual Fund, pension funds set up by mutual funds, equity-linked savings plans, deposits with National Housing Bank and tuition free paid for education of children.

Source: Financial Express

7 Comments

  1. The proposal to discontinue savings upto Rs.1.50 lakhs under section 80C and raising the income tax exemption limit to Rs.4.00 lakhs should be opposed by the central government employees, since the burden of taxation increases by Rs.15,000/- as can be seen under:
    Present income tax liability for taxable income of Rs.10,00,000/- less savings under section 80 C amounting to Rs.8.50 lakhs works out to Rs.95,000 + Education cess.
    whereas the income tax liability for Rs. 10,00,000 under the proposed scheme will be as under
    From 4,00,000/up to Rs. 5,00,000 the tax liability @ 10% works out to Rs.10,000/.
    From 5,00,000 to Rs.10,00,000, the tax liability @ 20% comes to Rs.1,00,000/-
    Thus the overall liability will be Rs.1,10,000 + education cess.

  2. What a foolish proposal to do away with the saving clause under section 80C. This will not only discourage savings, but at the same time increase the income tax liability to a great extent. In every budget the salaried employees expect some kind of relief from income tax liability. Never in the history of indian budget proposal, additional burden of income tax was cast on the salaried employees in the new budget than the existing income tax liability. The rise of income tax limit from Rs.2.5 lakhs to Rs.4.00 lakhs shall benefit the salaried employees only if the saving clause under section 80c upto 1.5 lakh is retained. If this benefit is taken away, the rise in the exemption limit from Rs.2.5 lakhs to Rs.4.00 lakhs shall not yield any benefit at all. By the new proposal the tax liability for income group upto Rs.5.00 lakhs shall remain the same. They are neither benefited nor affected. But the tax liability of those in the income group from 5.00 to 10.00 lakhs who are in 20% slab, will result in additional tax burden of Rs.15,450 and for those in the income group above 10.00 lakhs who are in 30% slab the additional liability will be Rs.30,900. Even the tax lliabililty of a person drawing 6,50 lakhs per annum which is only Rs.25,000 + education cess at present will be Rs.40,000 + education cess under new propsal which can be seen from the following calculation: (Present liability Rs.6.50 lakh – Rs.1.5 lac saving = Rs.5.00 lakhs- exemption limit of Rs.2.5 lakhs =Rs.2.50 lakhs x 10% will be just Rs.25,000 + education cess. In the new proposal contemplated by the Finance Minister, the tax burden will be Rs.40,000+ education cess.(4.00 lakhs to 5.00 lakhs Rs.10,000 @ 10% 5.00 lakhs to 6.50 lakhs Rs.30,000 @ 20% totalling to Rs.40,000+ education cess.
    This is totally a senseless proposal which should be condemned by all the salaried class.
    RAVI S

  3. It is a very good proposal. The salaried persons can improve their life style a little bit as medical expense and education cost have grown so rapidly. Childrens are futures of nation. They can make their childrens career bright by spending more and need to invest also not in ELSS tax savings scheme for saving taxes. The documentation process also will be easier and calculation of Income Tax. It was written in Direct tax code and in this budget it is a welcome move if implemented and a first step towards implementation of Direct tax code which will make even income tax laws simpler.

  4. In my opinion, this is not a bold move.
    Government is trying to fool employees.
    For example, as of now, suppose the taxable income is 6.5 lakhs.
    Taxable income : 6.5 lakhs
    (less)80C deductions: 1.5 Lakhs
    actual taxable income: 5 Lakhs
    This amount comes under 1st Slab
    Income tax (excluding cess) = 10%of (5lakhs – 2.5lakhs) = 25,000

    Suppose, 80C is added to standard deduction
    Taxable income : 6.5 lakhs
    (less)80C deductions: 0 Lakhs
    actual taxable income: 6.5 Lakhs
    This amount comes under 2nd Slab
    Income tax (excluding cess) = 25,000 =25,000+20%of (6.5 lakhs – 5 lakhs) = 25000+30000
    = 55,000
    So, if slabs are not readjusted, employee will lose additional Rs.30,000

  5. This decision will be a burden on all the saving people.
    Let me justify with an example. Let the taxable income be 6.5 Lakhs.
    a) The calculation with existing slab and 80C exemption
    taxable income = 6.5 Lakhs
    80C exemption = 1.5 Lakhs (less)
    Net Taxable income = 5 Lakhs (This amount belongs to 1st slab of tax)
    Tax to be paid = 10%(5-2.5) Lakhs = 25,000

    b) The calculation with existing slab and no 80C exemption
    taxable income = 6.5 Lakhs
    80C exemption = 0 Lakhs (less, no exemption, to be deducted directly)
    Net Taxable income = 6.5 Lakhs (This amount belongs to 2nd slab of tax)
    Tax to be paid = 10% of (5-2.5-1.5) Lakhs + 20% of (6.5-5) Lakhs = 10,000 + 30,000 = 40,000

    The net difference = 40,000 – 25,000 = 15,000 excess is to be paid by the tax payer

  6. this argument of the Finance Ministry is not correct. Let them have a mechanism to verify the investments made by the employees / pensioners as the PAN is indicated in almost all transactions. If this argument applies for SEc 80 C, then what about for other deductions such as 80 D, mediclaim policy, 80 DD physically handicapped dependents, 80 DDB, medical expenses for some diseases, 80 G for donations etc. etc.,
    If the investments are made by the employees / pensioners, it is fully available by the respective agencies such as post office, insurance companies, banks for HBA advance etc etc.. Further the employees / pensioners will get back the money after the lock in period is over.
    Alternatively, if the I T slab itself is raised to Rs. 4 lakhs, the relief will however be available immediately to the assessees but in a future date they cannot get back the money. Further, when the I T is slashed, not only the Union Govt will be depried of the tax collections but also the States also will lost considereably as the Revenue is distributied between the Union and the States as per the Constitution and as per the recovemmendations of the Fiannce Commissions from time to time.
    Hence in my view, the limit for investments shuld be raised .

  7. Sir,
    The proposal of the Finance Minister to do away with the exemption under Section 80C for savings upto RS.1.5 LAKHS AND to rise INCOME TAX EXEMPTiON limit from RS.2.5 LAKHS to Rs.4.00 lakhs shall result in excess taxation liability than the present one. For those in the income group upto Rs.5.00 lakhs, the income tax liability in the existing scheme and the proposed scheme will be Rs.10,300/- without any increase or decrease in the income tax liability. However for those in the income group from Rs.5.00 lakhs to Rs.10.00 lakhs, there will be an additional liability of Rs.15,450/- and for those in the income group above Rs.10,00,000/- the additional liability will be Rs.30,900/- if no provision is made for exemption of Rs.1.50 lakhs under Section 80C,. As such the expectations of salaried employees who are awaiting some relief from income tax burden will be shattered. Therefore, it is desirable that the Finance Minister should not scrap the exemptions allowed under Section 80C but on the other hand should enhance the limit of saving from Rs.1.50 lakhs to Rs.2.00 or to Rs.3.00 lakhs, which will not only reduce the tax burden but at the same time encourage savings.
    M.DORAI

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