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Investment instruments that make sense despite losing tax advantage under new regime

Investment instruments that make sense despite losing tax advantage under new regime

Investment instruments that make sense despite losing tax advantage under new regime
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By Alok Agarwal  Apr 18, 2020 9:39:29 AM IST (Updated)

It is important to understand that tax saving investments and goal-based investments are two different concepts.

A new optional tax regime has been proposed by the Finance Minister in Budget 2020, under which individuals would be taxed at reduced tax slabs. But these individuals would have to forego exemptions (e.g. house rent allowance, leave travel allowance) and deductions (e.g. standard deduction, deduction for interest paid on housing loans and deduction for tax-saving investments), which were otherwise available under the existing regulations.

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With respect to savings and investment options, the non-availability of some tax deductions leads to uncertainty regarding investment decisions to be made by individuals. Particularly this may impact the younger generation, as they may not have any incentives to save enough for the future.
It is important to understand that tax-saving investments and goal-based investments are two different concepts. Even if the deduction in tax saving investments would not be available under the new optional tax regime, investment for future should be made by individuals keeping in mind various factors such as life goals, tolerance to risk, need for liquidity, etc., to determine the best possible avenues.
Here are some 'tax-saving' instruments, which can still be considered for goal-based investing even by those who opt for the new regime.
1. Public Provident Fund (PPF):
One can opt to invest in a PPF account to obtain benefits of tax free interest of 7.10 percent per annum. Further, this account can be kept active with a minimum annual contribution of only Rs 500. The annual interest accrued is exempt from tax and the maturity proceeds are also fully tax exempt.
Though PPF comes with a lock-in of 15 years, there is a loan facility available from the PPF account from the completion of first financial year from the date of subscription till the end of the fifth financial year. While the annual investment is subject to a limit of Rs 150,000, the accumulated balance at the end of this period can be a meaningful sum due to the compounding effect.
While tax deduction at investment stage into PPF would not be available under the new tax regime, it can still considered to be good investment due to its tax free interest and tax benefits at the accretion and withdrawal stages.
2. National Pension Scheme (NPS)
NPS is a defined contribution pension plan. The employers’ contribution to NPS is proposed to be allowed as a deduction from taxable income, even under the new tax regime. As per prescribed rules, the entire employer contribution to NPS is first considered as income and then a deduction is allowed up to a maximum of 10 percent of salary. While the employee contribution to NPS would not be allowed as a deduction under the new regime, the accretions in value of NPS and withdrawal at the age of retirement is not considered taxable.
Currently up to 60 percent of the accumulated balance is allowed to be withdrawn from NPS which is fully tax exempt and the remaining 40 percent is used to purchase annuity which is taxable in the year of receipt at applicable rates. In addition to the above, NPS is also known to charge a much lower fund management charge as compared to mutual funds, making it a good investment option.
For individuals making high retiral investments, Budget 2020 has proposed to limit the total tax-exempt amount of employer's contribution to an employee's EPF, NPS and superannuation account up to INR 7.5 lakh in a financial year; the excess contribution amount and corresponding accretion will be taxed in the employee’s hands on an annual basis.
3. Employee Provident Fund (EPF)
While PPF investment can be made even by self-employed individuals, EPF is an investment scheme only for salaried employees. For employees qualifying under the definition of excluded employee, subject to company policies, PF contribution is optional for the employees. These employees may consider investing in EPF.
The contributions made by the employee would not be eligible for deduction under the new tax regime. PF contributions are also eligible to tax free interest income (subject to conditions), for FY 2018-19 this interest was 8.65 percent per annum.
The accumulated amount in the EPF account can be withdrawn at the time of retirement or while changing jobs (subject to conditions). This withdrawal would be fully tax exempt if withdrawn after 5 years of continuous contribution (which may include more than one employment).
The proposed change mentioned above for high retiral investments in NPS also applies for employer’s contribution to EPF.
4. Sukanya Samriddhi Yojana (SSY)
SSY is a social welfare scheme meant for up to two girl children. SSY provides tax free interest of 7.6 percent (subject to satisfaction of conditions). A minimum of Rs 250 must be deposited in the account initially. Thereafter, any amount in multiples of Rs 100 can be deposited.
While no deduction is available at the time of contribution under the new regime, the interest earned and the maturity proceeds are tax free. The account has a lock-in period of 21 years and partial withdrawal is allowed after the girl child turns 18. While the annual investment is subject to a limit of Rs 1,50,000, the accumulated balance at the end of this period can be a meaningful sum due to the compounding effect.
5. Unit-Linked Insurance Plan (ULIP)
ULIPs are insurance cum investment instruments offered by insurance companies. While the premium paid for ULIP would not be eligible for deduction under the new regime, the death benefits and maturity benefits are fully tax exempt as per the income tax provisions. This exemption is without any upper limits.
The above mentioned investment options include a mix of market-driven and fixed income returns. Having a judicious mix of both depending upon the investor’s profile and factors mentioned earlier, may enable investors to reach their desired goals.
Alok Agrawal is Partner with Deloitte India
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