The recent budget had something that has made salaried individuals really anxious. The Central Government has expressed intention to do away with the tax exemptions under Section 80C of the Income Tax Act sometime in the future.
So far, millions of salaried people take the benefit of those exemptions every year. The expectations are that the government will find a tax neutral rate, which means the salaried individuals will have to pay same tax without the exemptions in the future as they are paying now with the exemptions.
It’s a good move because it will make tax filing simple and people will not have to run behind CAs to do the needful. However, the Finance Ministry will have to ensure that they take extreme care to arrive at tax neutral rate.
There are so many exemptions under Section 80C, most prominent being for investment in provident fund, premium payment for life insurance and repayment of home loan principal amount. There are several permutations and combinations in which crores of taxpayers every year make such investments to save tax.
The government will have to consider the welfare of all such people while arriving at a tax neutral rate. If it finally arrives at a tax regime like this, it will be nothing but a monumental achievement.
There is another angle here. Once the exemptions are taken away, people will make investments solely for investment reason and not to save tax obligation. Financial experts think that it’s always best to make an investment with the objective of earning a return and not to save tax.
Often, investment companies package a product in such a manner that its tax savings feature far outweigh in importance compared to its return potential. The selling agents can fool an individual by harping upon the tax part even when he wants to make an investment.
Such practices will stop once the exemptions are taken away because the companies will be forced to come out with products just from investment perspective and not from tax-saving angle.
In the exercise of removing exemptions, the government will also have to consider how it will mobilise funds. As of now, it mobilises funds in thousands of crores every year through PPF, LIC, etc. Once the tax exemptions are out, how will the government get funds?
Fair enough, the government can borrow from other sources at a much lower interest rate. For example: it makes no sense to pay 8 per cent per annum on PPF if the government can borrow at less than 5 per cent.
Still, the government will have to calculate how much it will have to borrow and at what rate after it does away with the exemptions. For salaried individuals, time has come when they start thinking of yearly investments as an exercise to make return and safeguard their future and stop thinking of only saving taxes.
