Finance Minister Arun Jaitley is expected to double exemption limit on long-term financial savings to ease tax burden on the middle class in his maiden budget on Thursday, sources told NDTV. Currently, the income tax exemption limit on such savings is capped at Rs 1 lakh.
Savings instruments such as housing loan repayment (principal), five-year and above tenure fixed deposits, provident funds (PFs) and life insurance policy premiums are some investment vehicles that qualify for tax exemption under Section 80C of the Income Tax Act.
(Also read: Five Tax Expectations From Arun Jaitley's Maiden Budget)
If Mr Jaitley doubles the exemption limit to Rs 2 lakh, high earners (taxable income above Rs 10 lakh) will save Rs 30,000 in taxes per year. Those in the mid-income category (taxable income Rs 5-10 lakh) will save Rs 20,000 in taxes, while individuals in the Rs 2-5 lakh tax bracket will save Rs 10,000 per year.
The move will incentivise domestic savings, which is an important source of low-cost funds for the government. Economists say this money could be utilised for infrastructure development, which is the top priority for the Modi government.
However, a Rs 1 lakh hike in exemption limit will cost the government over Rs 30,000 crore in foregone revenues. Mr Jaitley may have to compensate for the loss in revenue by hiking other taxes such as excise duty or import duty. The other option is to drastically hike the divestment target for this year from the current target of Rs 36,925 crore.
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