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Exemption cap for income tax may go up to Rs 1.5 lakh
February, 01st 2007

You may soon be able to tuck away Rs 50,000 more into saving schemes eligible for tax breaks, and thus save up to Rs 15,000 on taxes. This is likely to be the finance ministers gift to individual taxpayers this Budget.

The finance ministry is likely to raise the limit on savings that qualify for income-tax deduction from Rs 1 lakh to Rs 1.5 lakh. Investments in infrastructure bonds, bank deposits, contributions to life insurance premia, provident fund, deferred annuity schemes, public provident funds and so on qualify for tax deduction under Section 80C of the Income Tax Act.

The proposal, slated to be discussed with PMO, is in line with the governments objective of promoting investments in financial assets to spur growth. Household savings in financial assets stood at a mere 10.3% of GDP in 04-05 while savings in non-financial assets stood at 11.3%.

Banks are also under pressure to bolster deposits to meet growing credit demands. A hike in the 80C limit could increase deposit mobilisation, particularly for risk-averse individuals. Sweeteners like a shorter lock-in period for investments in bank deposits are also being considered to make them more attractive. At present, only bank deposits for at least five years qualify for Section 80C benefits.

Sources said the ministry is also weighing the pros and cons of restructuring the income-tax slabs to give relief to taxpayers across the board. But one view is that big-bang reform measures in personal I-T could perhaps wait till the 2008-09 Budget. Tax slabs were recast in the 2005-06 Budget along with the abolition of standard deduction.

One option is to raise the exemption limit and widen the tax slabs. This will leave more money in the hands of taxpayers. However, the government is also wary of possible criticism from the Left on lowering the tax liability of individuals with taxable incomes above Rs 10 lakh per annum.

The revenue department is not in favour of a second round of slab restructuring at this stage as it would entail a huge revenue loss.

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