This may sound strange, but this may indeed be true for many taxpayers. Why?
Because the Union Budget 2023 has incentivized the New Tax regime in a big way by reducing the tax rates in the various income slabs. And the New Tax regime does NOT give you any tax benefits for tax-saving investments. No concept of tax-saving investments in the New Tax Regime. Hence, if the New Tax regime works out better for you, you don’t have to worry about tax-saving investments from the next financial year.
If you are a salaried employee, you will be better off in the New Tax Regime unless your tax-saving expenses/investments exceed Rs 3.75 lacs (this excludes standard deduction of Rs 50,000, which is available under both regimes).
Now, how will you touch Rs 3.75 lacs?
- 1.5 lacs to Section 80C.
- Rs 25,000 for medical insurance (Section 80D). Can be higher if you are a senior citizen or are paying for your parents too.
- Rs 50,000 for investment in NPS (Under Section 80CCD(1B).
That adds up to only Rs 2.25 lacs.
As I see, unless you stay on rent (and claim tax benefit through HRA) or are still repaying your home loan (and claim tax benefit for interest payment under Section 24), it is difficult to touch that threshold mark of Rs 3.75 lacs.
So, if your numbers warrant that you pick up the New Tax regime in the next financial year, FY2023 could be the final tax-saving season.
Tax-Saving Is NOT Everything
Most of us have at least one regret story to share about a bad investment we made just to save taxes. And a problem with most tax-saving investments is that you just don’t have to pay once. Hence, unless we are willing to bid goodbye to your initial investment, you must keep repeating the mistake for a few years. Insurance and investment combo plans are a classic example.
Without denying that my opinion is biased, there are products such as traditional life insurance plans and ULIPs that investors found attractive solely because of tax benefits. The entire industry flourished because of these tax-benefits and the front-loaded sales incentives (and not necessarily on the product merit).
Not everything is bad though. For some, this tendency to maximize tax-savings has ensured some savings and investments from the money which would otherwise have been spent.
By the way, it is not just poor insurance products that will lose their sheen for taxpayers opting for the new tax regime. Even for good products such as PPF and ELSS, the allure will go down if you don’t have to make tax-saving investments. There is no need to prefer ELSS over other equity funds, unless you believe ELSS funds perform better.
However, look beyond picking investments just for tax-savings. Invest to achieve your financial goals. And there are investments/products that are a good choice even when you do not get tax benefit on investment.
Consider Public Provident Fund (PPF), my favourite tax-saving investment. Tax benefits or not, it remains one of the best investments for the fixed income portion of the long-term portfolio.
PPF belongs to the rare category of Exempt-Exempt-Exempt investments.
- PPF gets you tax benefits on investment. OK. The tax benefit will go away in the New Tax Regime.
- Interest earned is exempt from tax.
- The Maturity amount is exempt from tax.
Under the New Tax Regime, (1) will go away. (2) and (3) still remain. With very good risk-free returns for a fixed income product, PPF is an easy choice for most investors.
Think about life insurance and health insurance. You need these in your insurance portfolio with or without tax benefits.
Which Tax-Saving Investment to Pick This Year?
Various tax-saving investments differ in the following aspects.
- Expected returns
- Treatment tax of income and on maturity
Equity funds (ELSS) and ULIPs are expected to offer better returns over the long term because of the equity angle. No guarantee though. PPF stands out in the fixed income space. Traditional life insurance plans will rank low here.
But equity MFs and ULIPs also carry much higher risk compared to PPF and traditional life insurance plans.
PPF/SCSS/SSY are zero cost products. ULIPs and traditional plans are very expensive products. And higher costs eventually impact returns.
PPF matures in 15 years (you have an option to extend the account). ELSS and ULIPs lock in your investment for 3 years and 5 years respectively. Traditional plans have a devious exit cost to get you to stick around. With NPS, you are almost locked-in until the age of 60. While Section 80C investments are supposed to be long term, you must consider product maturity while picking investments. You may not want to open a PPF account after you have turned 60.
PPF and SSY fall in EEE (exempt-exempt-exempt) basket. Traditional life insurance plans (bought on or before March 31, 2023) and ULIPs (with aggregate premium <=2.5 lacs) fall in the same bucket. SCSS and 5-year tax-saving FD interest is taxable. Capital gains on sale of ELSS are taxed at 10%. NPS fetches you exclusive benefit under Section 80CCD(1B) but the income from mandatory annuity purchase for 40% of accumulated corpus is taxed at marginal tax rate in the year of receipt.
Over and above, consider the utility of the investments in your overall portfolio. For instance, if your portfolio is already equity-heavy, allocating to PPF will add balance to the portfolio.
Consider all the above aspects while selecting a tax-saving product. Trust your judgement.