The Budget for 2005-06 is unlikely to toe the Kelkar panel's line of doing away with tax incentives on long-term savings and housing, but Finance Minister P Chidambaram will have a 'hard look' at all other sops in a bid to widen tax base.
The move to retain sops on housing, insurance and pension schemes comes after pressure from Congress and Left parties. There has been pressure from within the United Progressive Alliance to retain these sops to raise the savings and investment rates, which was necessary for the country to sustain high economic growth in the years to come, sources said in New Delhi.
That apart, the housing sector is booming on the back of industrial and services sectors and the government did not want to dampen it by removing the tax incentive of up to Rs 1.5 lakh on interest payment for housing loans.
Housing sector is also a major employment generator and creates demand for allied industries like steel and cement.
Sources said tax sops for insurance and pension may also continue as these sectors contribute to savings.
The insurance industry, as well as the regulator IRDA, had sounded the alarm bell when Kelkar panel had suggested lifting of various exemptions under Section 88, 80CCC and 10(10D) of Income Tax Act.
Since India does not have a social security system, sources said the budget will keep intact the incentive of Rs 10,000 annual deduction from income for pension contribution as envisaged under Section 80 CCC of Income Tax Act, in order to encourage more people to save for retirement.
Insurance industry has gone a step forward and suggested that the limit be raised to Rs 20,000 from the present 10,000 under Section 80 CCC.
Sources said tax exemption for pension and provident funds may be streamlined following the introduction of new defined contribution pension system.
At present, the contribution going to employees provident fund scheme (EPFO) is taxed only during withdrawal and is exempt during contribution and accumulation stages following the 'EET' model.
The contribution for the new pension system would be treated at par and would follow the EET model, sources said. Moreover, the tax rebate on account of Section 88 for insurance premium may also continue, sources said.
The Kelkar panel had suggested hiking the income tax exemption limit to Rs 1.5 lakh and elimination of tax rebate for insurance policies.
Sources said the finance minister may not raise the income tax exemption limit in one go but retain the standard deduction limit and sops for investing in insurance policies.
The full exemption on the maturity value of insurance schemes and the bonuses would also continue as envisaged under Section 10(10D) of Income Tax Act.
The Kelkar panel had proposed that this exemption be discontinued for new policies. However, industry sources said the Section 10(10D) was crucial as insurance policies are bought as maturity or terminal benefits are not taxed in the hands of policyholders.
Removal of this benefit will be a death blow to insurance as it will lead to taxation in all three stages -- on initial contribution, on investment income in the hands of insurers (at 12.5 per cent of surplus) and on payout at the end.
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