Finance Minister Jaswant Singh may bite the bullet on personal income tax by diluting the exemptions on investments in small savings instruments under section 88 of the Income Tax Act.

He is, however, expected to sweeten the pill for the middle class and salaried individuals by retaining standard deduction and increasing income tax exemption limit in Budget 2003.

At present, a 15 per cent tax rebate is available for investments in small savings instruments such as National Savings Certificate and Post Office Monthly Income Schemes for individuals in the Rs 1.5 lakh to Rs 5 lakh (Rs 150,000 to Rs 500,000) annual income bracket.

Finance ministry sources suggested that the rate could be reduced to 10 per cent, which would result in additional revenue of almost Rs 3,000 crore (Rs 30 billion).

The sources said that the minister would be forced to take this step to balance the giveaways on account of raising the income tax exemption limit from the present Rs 60,000 and retaining standard deduction.

Finance ministry estimates the revenue foregone owing to standard deduction alone at Rs 7,500 crore (Rs 75 billion).

While a final decision is expected to be taken only next week, the prime minister has reportedly given Singh a free hand to rework the tax structure.

Trends in small savings collection for this fiscal show that it has almost touched the budget estimates in spite of the reduction in tax rebates effected in Budget 2002.

Real interest rates on small savings instruments have been the highest during the tenure of the present government, largely because of low inflation for the past two or three years.

According to ministry's estimates, almost 73 per cent of the 20 million salaried employees who file their returns have an annual income below Rs 1.5 lakh.

A standard deduction of up to Rs 30,000 is available to these individuals. So, diluting Section 88 would not affect the core of the middle-class.

Also, while it was certain that the income tax exemption limit would be raised, the minister had not yet finalised whether it would be a marginal rise to Rs 75,000 or more.

The Kelkar task force on direct tax had recommended elimination of tax rebates for all small savings instruments, except for contributions to pension fund. It had argued that this would make savings flow into capital markets.

Run-up to the Budget 2003