For instance, PPF (Public Provident Fund) or ULIPs (Unit linked Insurance plans) have been popular investment avenues for individual taxpayers primarily because they are eligible for deductions from taxable income, thereby generating savings in tax expenditure. However, tax saving investments and expenditures are subject to limits specified in the tax laws. For example, the deduction for investment in PPF is capped at Rs.1,50,000. These limits must be periodically revisited and recalibrated to align the deductions and exemptions with economic conditions, inflation rates, and societal needs. However, some of these limits have remained unaltered for a number of years, rendering them irrelevant in today’s economic scenario. Hence the need to be revised. Here are a few examples.

1. Increase the limit of deduction under section 80C (tax saving investments such as life insurance premiums, provident fund contributions, tuition fees, investments in equity-linked savings schemes, principal repayment of home loan, etc.) – from Rs 1,50,000 to Rs 2,50,000.

2. Enhance the limit under section 80CCD(2) of the Act for employer contribution to the National Pension Scheme (NPS) from 10% to 14% of basic salary. This would bring parity between deductions allowed for NPS in respect of central government/state government employers and other employers.

3. To meet with the ever-increasing cost of medical treatment, increase the deduction for medical insurance for self and family from Rs 25,000 to Rs 50,000. It also includes increasing the limit for preventive healthcare check-up from Rs 5,000 to Rs 15,000.

4. Increase the limit for House Rent Allowance for Tier 2 cities, given the increasing rents in these cities. This exemption is currently capped at 50% of basic salary for the 4 metro cities – Delhi, Mumbai, Chennai, and Kolkata, while it is 40% of basic salary for other cities. The higher exemption of 50% should be extended to tier 1 and tier 2 cities such as Bengaluru, NCR, Hyderabad, Pune, etc.

5. Increase the deduction for interest income from savings accounts with a bank or post office from Rs 10,000 to Rs 50,000, and extend the deduction to interests from deposits as well. A revision in the limits for deductions and exemptions as mentioned above, would lead to a reduction in tax liabilities for individuals and promote savings, thereby boosting disposable income.

It is pertinent to note that under the simplified tax regime, which is now the default regime for taxpayers, no deductions and exemptions are available, barring a few.

• Standard Deduction from salary income
• Deduction for employer contribution to NPS.
• Allowances notified under section 10(14) of the Act
• Standard deduction for family pension (Rs 15,000 or 33.33% of such income whichever is less).

The simplified tax regime offers an option to individuals and HUFs to pay taxes at reduced rates, at the cost of letting go of certain exemptions and deductions. Taxpayers should compare their tax liability under the simplified tax regime and the old tax regime, while planning their tax saving investments and expenses for the financial year. One can use the calculator available on the income tax website (https://incometaxindia.gov.in/) to compare the tax liability under both regimes and plan accordingly.

If the simplified tax regime works out to be more beneficial, expenditures such as rent, schooling, medical insurance as well as investments such as PPF, insurance premiums, etc., will not fetch any tax breaks and need not be baked into the household budget for tax optimization purposes. Taxpayers can instead make investment decisions based on other factors such as returns, liquidity, safety of investment and channelise expenses according to their domestic priorities.