Standard deduction may be raised to Rs 1.2 lakh

Individual tax payers may be able to avail of higher standard deduction on taxable income from the next financial year with the finance minister considering raising the standard deduction limit to Rs 1,20,000, from the present Rs 100,000, under Section 80C of the Income Tax Act, 1961.

This 20 per cent increase will allow a taxpayer to save up to Rs 2,000 in taxes every year, a senior government official said.

An announcement may be made in the Budget on February 29, which is likely to be the last before the next general election.

Under Section 80C, 80CCC and 80CCD of the Income Tax Act, individuals can claim total deduction up to Rs 1,00,000 a year towards life insurance premia, five-year bank deposits, provident fund, superannuation fund, national saving certificates, tuition fees and many other investments like in mutual funds.

The list of savings and investments that qualifies for deduction under Section 80C was expanded in December, 2007 to include five-year post office time deposits and the senior citizens savings scheme.

The deduction of Rs 1,00,000 for such a large number of savings and investment items is grossly inadequate, tax experts said.

"To accelerate capital formation in the economy, the government should think of increasing the deductions under Section 80C to Rs 1,50,000. This will definitely fuel savings growth," said Gaurav Taneja, partner, Ernst & Young.

However, it is anticipated that the increased investment limit under Section 80C may be allowed only for specified savings instruments like a pension scheme aimed at promoting old-age security.

The insurance industry has been demanding a separate exemption limit of up to Rs 1,00,000 for very long-term investments like pensions and annuity schemes.