Will the Budget 2024 Increase the Section 80C Deduction Limit?

Section 80C tax deduction limit was last increased in 2014 when the NDA government came to power. Since then, the limit hasn't changed, especially with the shift to the new income tax regime. Some tax experts think that the recent election results might prompt the government to reconsider and possibly increase the limit.

Besides seeking adjustments to income tax rates, many taxpayers are hopeful for an expansion of benefits under Section 80C. Right now, Section 80C lets you reduce your taxable income by up to ₹1.5 lakh if you invest in certain things or spend money in specific ways. People are expecting that this ₹1.5 lakh limit will be raised.

What is Section 80C?

Section 80C offers tax benefits for specific investments and expenditures. You can get tax deductions for investing in instruments like Public Provident Fund (PPF), Employee’s Provident Fund (EPF), Equity Linked Savings Scheme (ELSS also known as tax saving mutual funds) and National Pension Scheme (NPS). While you can invest more in these instruments, the tax deduction benefits are capped at an investment of up to ₹1.5 lakh. Additionally, tax deductions are available for certain expenses such as paying your children's school or college fees and insurance premiums including traditional plans like endowment or Unit Linked Insurance Plans (ULIPs).

What about Old Tax regime?

The biggest problem with increasing Section 80C tax deduction benefits is that it only applies to people who choose the old tax regime. In 2020, Finance Minister introduced a new tax regime with lower tax rates but fewer deductions. Since then, the government has been encouraging people to switch to the new regime. In her 2023 interim budget speech, she made the new regime even more appealing by increasing the tax rebate, raising the basic exemption limit, introducing a standard deduction and reducing the highest surcharge.

However, the recent election results, where the current government didn't get a clear majority, suggest that the government might offer some tax benefits to win over the middle class and its coalition partners. Increasing Section 80C deductions has been a popular demand but the government also needs revenue to address rural issues. A simpler tax regime is easier for people to manage and benefits them with lower tax rates. Sonu Iyer from EY India believes that while both tax regimes will continue for now, the government is unlikely to increase Section 80C benefits.

Analyst View

Some experts suggest that in Union Budget 2024, the government should consider increasing the limit for tax deductions under Section 80C from ₹1.5 lakh to ₹2.5 lakh. They argue that this adjustment is overdue because inflation has eroded the value of the current limit over the past decade.

They also propose making these deductions available under the new tax regime, which offers lower tax rates and reduces the need for taxpayers to provide proof of their investments and expenses. This change could potentially boost disposable incomes, encourage savings, and spur investments.

Chetan Chandak, a chartered accountant, thinks differently. He believes the new income tax system with lower tax rates has already made life easier by removing the need for taxpayers to provide proof of their Section 80C investments. This shift has also lightened the workload for the tax department. Chandak is concerned that if the government raises the Section 80C deduction limit to, for example, ₹3 lakhs or ₹4 lakhs it could tempt many individuals to make false claims for these increased deductions, even if they haven't actually invested that much. This could lead to false claims, making it harder for the tax department to verify everyone's returns.

Mayank Mohanka, a chartered accountant strongly supports the government's shift towards the new income tax regime. He feels the government has been gradually implementing changes based on recommendations, which he sees as a well thought out decision. Mohanka believes the new regime with its lower tax rates, already empowers taxpayers by giving them more control over their investments.

He doesn't think the government will increase Section 80C tax deductions because the new regime itself provides flexibility for taxpayers to invest as they see fit. All eyes are now on July 23, when the Finance Minister will present Budget 2024 to see what changes may come.