Tax sops on savings will aid growth
India’s 12th Five-Year Plan (2012-17) was approved on December 27, 2012, targeting an average growth rate of 8% during the Plan period with emphasis on the infrastructure sector. According to the Plan document, an estimated $1 trillion ( R100,000 crore) is required to fund projects to build highways, ports, airports and railways. Apart from foreign direct invest- ment (FDI), it may be possible to meet the funding requirement in infrastructure through domestic savings, of which household savings form a crucial component.
India has one of the highest household savings rate globally. Gross domestic savings (GDS) as a percentage of gross domestic product (GDP) in India was last reported at 30.31 in 2011, according to a World Bank report published in 2012. The Planning Commission has projected a sharp increase in India's GDS during the 12th Plan (2012-17) in the range of 36.2-37%.
Employees can be motivated for channelising their savings through various tax incentives. At present, several investment schemes are clubbed together for claiming an overall tax deduction of up to R100,000 in a tax year under Section 80C of the Income-tax Act (ITA). It is time to take a relook at this limit and consider increasing the same in the upcoming Budget. Additional tax sops (over and above the limit of R1 lakh available under Section 80C) in the coming budget for investment in the National Pension System (NPS), life insurance schemes and infrastructure bonds could be a welcome step in channelising the savings and contributing towards the country’s growth. Tax deduction of up to R20,000 for investments in long-term infrastructure bonds was surprisingly withdrawn in the last Budget. Since these bonds were a means of channelising household savings directly into infrastructure projects, the government may need to evaluate reintroduction of these bonds in the upcoming Budget, perhaps with a higher limit. Similarly, a well-regulated pension and insurance market can go a long way in encouraging long-term household savings. India does not have a very robust social security scheme as compared to other countries. Pension funds currently are not allowed to invest in infrastructure. It may be recalled that the Deepak Parekh Committee on Infrastructure Financing, in 2007, recommended that insurance and pension funds be allowed to invest in longterm infrastructure funds.