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Government may increase individual tax benefits to boost household savings
June, 16th 2014

The government could increase the tax benefits it offers to individuals, encouraging people to save after the Reserve Bank of India and stock market watchdog Sebi made a strong pitch for raising the limit to encourage financial savings to wean people away from gold.

"Household savings need to be encouraged.... Tax exemption is seen as an important tool in that respect," a government official privy to deliberations said.

A final decision is, however, expected only after taking revenue considerations into account as the government has accorded top priority to fiscal consolidation. Prime Minister Narendra Modi has already warned of tough measures to repair the economy.

"There is a need to encourage savings, but it will have to be balanced so that revenues are not dented considerably," said the official, who did not wish to be named.

Decline in financial savings because of high inflation had caused current account deficit to widen to a record 4.8% of GDP in 2012-13 as households rushed to buy gold to hedge against rapid price rise.

Massive curbs on gold drastically reduced imports and helped narrow current account deficit to about 2% of GDP in 2013-14, but policymakers are worried that calibrated reduction in import duty on gold that is set to begin this budget could increase demand for gold again. Higher financial savings are also needed to lower interest rates and fund massive infrastructure investment that the government has planned. Economists say tax benefits will encourage financial savings.

"This will direct savings from physical assets to financial instruments that is much needed," said DK Pant, chief economist, IndiaRatings.

The regulators have asked the government to raise the 80C exemption limit, under which Rs 1 lakh is reduced from total income for the purpose of calculating tax. Individuals can claim tax exemption for investing in provident fund, national savings certificate, five-year fixed deposits, repayment of principal amount of home loans, children's tuition fee, public provident fund, some mutual funds and premium paid on a life insurance policy as part of the 80C basket.

The total estimated tax revenue loss on account of this incentive in 2012-13 was Rs 30,662 crore. "A number of instruments have been added to this basket but without raising the limit....Some more space is thus required to be created," said the official. For instance, over the years, spending on school fee and housing loan principal have been included in the basked, leaving less room for financial savings. One of the options is to increase the limit by creating an addition for infrastructure bonds, which was the case earlier. Sebi has suggested that the Rajiv Gandhi Equity Savings Scheme be done away with as it has not taken off.

The finance ministry is also of the view that the scheme needs a total revamp as it is too complicated and has failed to meet the objectives it was introduced for.

The previous UPA government had announced the RGESS in the 2012-13 budget, offering 50% tax rebate to new retail investors who invest up to Rs 50,000 directly in equities and whose annual income is below Rs 12 lakh.

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