New Tax Regime: Should one continue to invest in tax saving instruments such as PF, PPF, Insurance?

Finance Minister Nirmala Sitharaman introduced an alternate new tax regime in Union Budget 2020-21 which provided for lower tax rates for individuals compared to tax rates under the old tax regime. However, it comes with the condition that a taxpayer has to forego several deductions and rebates available under the old tax regime.

An individual has an option to choose either old tax regime or new tax regime for each financial year. However, based on developments in subsequent years, it is apparent that the government is looking to make new tax regime more attractive progressively.

Under the old tax regime, deduction from taxable income was available under Section 80 C in respect of certain specified investments viz contribution to Provident Fund, Public Provident Fund, Insurance, ELSS, NPS and so on. Maximum amount permissible for deduction in a financial year is ₹1,50,000.

As the tax benefit is now foregone for an individual opting for new tax regime, he/she needs to evaluate afresh investment decision based on three fundamental principles of safety , liquidity and return. Let us evaluate the popular investment avenues which were covered under sections 80C:

Contribution to Provident Fund (PF)

In respect of salaried employees, PF contribution is a mandatory requirement under Employees’ Provident Fund and Miscellaneous Provisions Act 1952 (“PF Act”) to take care of post-retirement funds requirement of the individual. It is considered risk free investment and has been providing about 8% annual return (declared annually by the govt) which is also exempt from tax.

Over and above the contribution mandatory under PF Act, a salaried employee can also make additional voluntary contributions. In case individual has surplus liquidity, he should consider making voluntary additional contribution as 8% tax exempt return in a safe avenue is extremely good. It may be noted that interest earned on such additional contribution is exempt from tax as long as total contributions (mandatory plus voluntary) do not exceed ₹2.5 lakh in one year.

Public Provident Fund (PPF )

PPF is a government scheme in which PPF account can be opened with several nationalised or other scheduled banks. Deposit of ₹1.5 lakh per year can be made in each account and the account matures on completion of 15 years. One has the option to keep extending the same in blocks of 5 years. Interest rates are periodically notified by the government. Currently it provides interest at 7.1% pa which is exempt from income tax. Being a govt scheme, it is considered risk free. This is an extremely good return and it is advisable to continue with this avenue of investment even after Section 80C tax benefit is foregone. In case of sudden liquidity requirements, scheme also provides for loan facilities as per prescribed conditions.

Life Insurance Premium

Life Insurance policy is taken by an individual primarily to ensure financial security to his/her loved ones in case of untimely death. Tax deduction allowed under section 80 C was a sweetener to improve the returns from the policy, it is believed that individuals would continue to opt for life insurance policies despite not having tax rebate on opting for new tax regime.

ELSS/ELSS Funds

Equity Linked Savings Scheme (ELSS ) is a mutual fund investing in equity of diversified companies with a lock-in period of three years. Like any other mutual fund investing in equity, it has higher risk and potential of higher return. Once an individual opts for new tax regime, ELSS would not remain an attractive option as one can invest in any normal equity oriented mutual fund and avoid lock-in period of three years.

Tax Saving FDs

These are Fixed Deposits with banks for a minimum period of five years. Interest received on such FDs is taxable as the interest from other FDs with banks. Once an individual opts for new tax regime, these FDs would not remain attractive for such individual.

National Pension Scheme

It is a market linked scheme managed by the govt and can provide higher returns than PPF over a long period of time. Scheme matures at the age of 60 years. Up to 60% of the funds can be withdrawn in one lumpsum and remaining amount can be taken by way of annuity only. This scheme can continue to be attractive to those individuals who would like to build up a pension plan post their retirement.

National Savings Certificate

It is a fixed income investment scheme with lock-in period of 5 years that one can avail from any post office. It is a safe investment and the current interest rate is 7.7%. However, such interest would be taxable in the hands of recipient and therefore, this is more suitable to individuals whose income is below taxable limit or marginal rate of tax is low.

To summarise, various avenues described above are still relevant for investment and decision of each individual can vary based on their facts and circumstances.

(PR Bansal is former deputy CFO of HCL Technologies)