With the withdrawal of tax benefits under the new regime, individuals must re-evaluate their investment decisions using the principles of safety, liquidity, and return.
Analyzing the Impact of New Tax Regime on Investment Avenues
The Union Budget 2020-21 brought about significant changes in the tax regime, offering lower tax rates for individuals under the new scheme. However, this benefit comes at a cost, as taxpayers are required to forgo various deductions and rebates available under the old tax regime. As individuals now have the flexibility to choose between the old and new tax regimes on an annual basis, the government’s apparent aim to enhance the appeal of the new tax system over time is worth attention.
Reevaluation of Investment Decisions
The old tax regime provided for deductions from taxable income under Section 80C, encompassing specific investments such as contributions to Provident Fund, Public Provident Fund, insurance, ELSS, NPS, among others. Moreover, the maximum permissible deduction in a financial year stood at ₹1,50,000. With the loss of tax benefits in the new tax regime, individuals must reassess their investment strategies, taking into account the fundamental principles of safety, liquidity, and return.
Impact on Popular Investment Avenues
The shift in tax regimes prompts a reevaluation of the popular investment avenues previously covered under Section 80C. Whether it’s Provident Fund contributions, investments in Public Provident Fund, insurance policies, ELSS, or NPS subscriptions, individuals need to carefully review these options. Factors such as safety, liquidity, and return now play an even more significant role in making informed investment decisions in light of the altered tax landscape.
By critically examining the impact of the new tax regime on traditional investment avenues, individuals can navigate these changes effectively and make informed decisions regarding their financial portfolios.
Contribution to Provident Fund (PF)
For many individuals, contributing to the Provident Fund (PF) is a legal obligation under the Employees’ Provident Fund and Miscellaneous Provisions Act 1952 (PF Act), serving as a crucial element in securing funds for retirement. This investment is regarded as risk-free and typically yields an annual return of 8% as declared by the government, which remains exempt from taxation.
In addition to the mandatory contribution specified under the PF Act, salaried employees have the option to make voluntary additional contributions. If an individual has surplus liquidity, it is advisable to consider making such voluntary contributions as an 8% tax-exempt return in a secure avenue is quite favorable. It should be noted that the interest earned on these additional contributions is also tax-exempt, provided that the total sum of contributions (mandatory and voluntary) does not exceed ₹2.5 lakh in a single year.
Public Provident Fund (PPF)
The Public Provident Fund (PPF) is a government-sponsored scheme that allows individuals to open a PPF account with various nationalized or scheduled banks. Contributions of up to ₹1.5 lakh per year can be made to each account, and the account matures after 15 years, with the option to extend it in blocks of 5 years. The interest rates are regularly notified by the government, currently standing at 7.1% per annum, which remains exempt from income tax.
As a government initiative, the PPF is considered a risk-free investment, offering an attractive return. It is advisable to continue with this investment avenue even after foregoing the tax benefit under Section 80C. Additionally, the scheme provides for loan facilities under prescribed conditions, offering a cushion for sudden liquidity requirements.
By utilizing these tax-saving investment options and re-evaluating their investment decisions, individuals can make informed choices that align with their financial goals and tax planning strategies.
Life Insurance Premiums
Life insurance policies are essential for providing financial security to beneficiaries in the event of the policyholder’s unexpected demise. While tax deductions under Section 80C have been an incentive for individuals to invest in life insurance, the potential loss of tax benefits under the new tax regime may not deter individuals from securing life insurance for their loved ones.
ELSS/ELSS Funds
Equity Linked Savings Scheme (ELSS) is a type of mutual fund that invests in a diversified portfolio of equities with a mandatory lock-in period of three years. While offering the potential for higher returns, it also carries higher risks, akin to other equity-linked investments. However, under the new tax regime, individuals may find ELSS less attractive as they can opt for regular equity-oriented mutual funds without facing the compulsory three-year lock-in period.
Tax Saving Fixed Deposits
Tax Saving Fixed Deposits are long-term deposits with banks, typically held for a minimum of five years. Interest earned on these deposits is taxable, similar to interest from other fixed deposits. However, under the new tax regime, individuals may find these fixed deposits less appealing due to the tax implications, potentially leading them to explore alternative investment options.
National Pension Scheme
The National Pension Scheme (NPS) operates as a market-linked retirement scheme that is administered by the government. Over an extended period, it has the potential to yield higher returns than the Public Provident Fund (PPF). The scheme reaches maturity when the participant turns 60. At that point, up to 60% of the accumulated funds can be withdrawn as a lump sum, with the remaining amount accessible through annuity payments. This aspect of the NPS makes it an appealing option for individuals seeking to structure a robust pension plan for their post-retirement years.
National Savings Certificate
The National Savings Certificate (NSC) stands as a fixed-income investment program with a lock-in period of 5 years, available for purchase at any postal office. Recognized for its secure nature, the NSC currently offers an interest rate of 7.7%. However, it is important to note that the interest garnered from this investment is taxable for the recipient. Consequently, this investment avenue tends to be more suitable for individuals whose income falls below the taxable threshold or those with a low marginal tax rate.
In summary, the investment options outlined above remain pertinent and appealing for various investors. The decision to opt for a specific avenue hinges on an individual’s unique financial circumstances and goals. With each option offering distinct benefits and considerations, the choice ultimately depends on a careful evaluation of personal facts and objectives.
By providing a comprehensive overview of the National Pension Scheme and the National Savings Certificate, individuals can make informed decisions aligned with their financial aspirations and retirement planning.
