The new government may have inherited an economy with a stretched state of finances but that has not curbed expectations that a friendlier income tax regime for individuals may be on its way.

Several reports have indicated Finance Minister Arun Jaitley may provide greater tax exemptions to individual taxpayers when he presents the budget for fiscal year 2014-15 sometime in July.

According to a report in the Economic Times today, financial-market regulators have suggested the government to consider raising the income-tax exemption limit under Section 80C from the current Rs 1 lakh limit.

The 80C tax provision allows individuals to lower their taxable income by that amount by investing in any combination of popular tax-saving instruments such as public provident fund, equity-linked saving-scheme (ELSS) mutual funds or unit-linked insurance plans (ULIPs), among others.

The ET report does not specify by how much have the regulators suggested the government consider raising the 80C limit.

Additionally, other reports have said the finance minister may allow for greater tax exemptions in sections other than 80C – such as doubling the exemption limit towards investment in health insurance (under 80D) from the current Rs 15,000 per year.

There has also been talk about introducing other tax-exemption vehicles that would facilitate investments in sectors such as infrastructure similar to a scheme launched by erstwhile FM P Chidambaram who launched long-term tax-free infra bonds in 2011.

The country’s tax structure has been the subject of much debate in the recent past, with about 4 lakh people paying over 60 percent of income tax collected in the country.

Further, given the persistently high inflation of the past several years, most tax-exemption limits that were set years ago look severely dated.

For instance, the tax benefit on housing loan interest was set at Rs 1.5 lakh was set in 2001 (even as property prices have zoomed several times since) while the reimbursement for medical expenditure at Rs 15,000 a year was decided in 1998, points out KPMG director Vineet Agarwal in an article on NDTV.com.

In the piece, Agarwal argues the government should consider raising the basic exemption limit from Rs 2 lakh to Rs 3 lakh, double the housing loan interest benefit to Rs 3 lakh, treble the 80C exemption to Rs 3 lakh and increase the medical reimbursement to Rs 50,000 from Rs 15,000 currently.

Such steps should have several cascading effects on the economy, by putting more disposable incomes in the hands of the consumer, it would help kick-start the slow economy while spurring critical sectors such as real estate.

But much as the expectations may be, the new BJP government -- which has in recent years projected itself as having a reform-oriented, low-tax philosophy -- may find the current state of economy to be a challenge.

For one, the steep fiscal deficit, which is the difference between the government’s yearly revenues and expenditure, is likely to keep the government from letting go of tax revenues.

Already, there is talk the tax department may find it extremely difficult to meet the 18 percent tax revenue growth target outlined by Chidambaram in the February interim budget.

To make up for lost revenues resulting from higher tax-exemption limits, the government will need to bring in several long-debated tax reforms that will widen the country’s narrow tax base – such as starting to tax agricultural income or bringing in the direct taxes code and the goods and services tax.

With the budget likely to be presented in a month’s time, the new FM clearly may not have too many options currently.