RBI chief Rajan calls for raising tax exemption ceiling

Days ahead of the union budget, Reserve Bank of India governor Raghuram Rajan today called for raising the tax exemption ceiling on financial investments by individuals, which is currently Rs1.5 lakh a year.

He said though there was a Rs50,000 increase in the limit in the last budget to Rs1.5 lakh a year, the benefits of this have been lost over time as the limit was anchored at Rs1 lakh for a long time.

"Remember the government increased the limit for tax benefit in savings by Rs50,000 in the last budget. The question is, is there room for more primarily because the real tax benefit has fallen over time because the limit was at Rs1 lakh for a long time. Maybe what we have to do is increase that," Rajan said on a call with analysts.

Investments of up to Rs1.5 lakh in the Public Provident Fund, Employees' Provident Fund, New Pension Scheme, insurance policies and equity-linked saving schemes is deducted from the taxable income. This helps in financial savings.

Finance minister Arun Jaitley, who increased the limit to Rs1.5 lakh in his July 2014 budget, will be presenting the first full fiscal budget of the new Government on 28 February.

Rajan also said that the Reserve Bank of India would like to see quality fiscal consolidation with a shift to capital spending rather than on mistargeted subsidies.

"A movement of spending from mis-targeted or poorly targeted subsidies towards more capital investment would be a good move," he said, adding that the RBI is not against subsidies but there are sections which need to actually get the benefits.

He said such a shift in spending will also help in inflation management as the supply side constraints would be removed with capital spending by the government.

The RBI had on Tuesday linked the future course of its policy action to fiscal consolidation.