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Cheers: Your tax-free investment limit may be hiked
October, 12th 2007
Individual tax payers may be in for some cheer. The tax-free investment limit for individuals may soon be hiked from the present Rs 1 lakh to Rs 1.5 lakh.

The proposal that the government is deliberating has a condition though: the additional Rs 50,000 will have to be invested in infrastructure bonds. The move is aimed at mobilising funds to bridge the resource gap of about $40 billion in infrastructure during the Eleventh Plan period (2007-2012).

The power ministry has already taken the lead, under the prime ministers direction, to launch Vidyut Vikas Patra or power bonds. The move may be announced in the next budget.

The government is considering enhancing the tax-free investment limit with the dual purpose of providing relief to tax payers and mobilising funds for the infrastructure sector, which requires about $500-billion investment during the Eleventh Plan. The move has been favoured by a standing group of power ministers constituted by the prime minister. The group has now constituted a sub-committee headed by Planning Commission deputy chairman Montek Singh Ahluwalia to fine-tune the proposal for inclusion in next years budget, an official source said. The move may also help the government in the event of snap polls, added the source.

Infrastructure bonds are reckoned to be good for mobilising resources; analysts see the new cap raising about Rs 3 lakh crore for infrastructure in the remaining four years of the Plan. The instrument lost its lure after it was stripped of the sub-limit for obtaining tax sops on such investments.
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Till the 2004-05 fiscal, individual tax payers were given a tax exemption for investments up to Rs 1 lakh per annum. This benefit enjoyed a sub-limit of Rs 30,000 as maximum investment in infrastructure bonds.

However, this clause was removed from the 2005-06 fiscal. Instead, infrastructure bond investments have since been made part of the overall Rs 1 lakh cap for availing tax benefit.

The sub-limit is now proposed to be restored with an enhanced exemption of Rs 50,000 to woo back tax payers.
It has been estimated that even if one-third of the tax payer base subscribes to power bonds, around Rs 75,000 crore could be mobilised each fiscal. The funds thus garnered would also benefit the power sector, which is short of about Rs 4.5 lakh crore in investment needs.

The Eleventh Plan has targeted a Rs 10.3-lakh-crore investment strategy for the sector. The power sector alone could mobilise over Rs 1.2 lakh crore over the next four years if the tax-free exemption limit is enhanced. This is assuming that 40% of the amount mobilised (in line with the share of power in infrastructure sector) from infrastructure bonds goes to the power sector, the source said.
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