Income Tax News: In the Union Budget 2020-21, Finance Minister Nirmala Sitharaman introduced a new tax regime offering lower rates but requiring individuals to forgo various deductions. With the option to choose between the old and new tax regimes, individuals need to reassess their investment decisions, especially under Section 80C. This article explores popular investment avenues affected by the new tax regime, focusing on safety, liquidity, and return.
Investment Avenues Post New Tax Regime
Contribution to Provident Fund (PF)
Mandatory for salaried employees under the PF Act, the contribution acts as a secure investment with approximately 8% annual returns, exempt from tax. Individuals can also consider additional voluntary contributions, enjoying an 8% tax-exempt return on surplus liquidity, provided the total contributions (mandatory plus voluntary) do not exceed ₹2.5 lakh in a year.
Public Provident Fund (PPF)
As a government scheme with a 15-year maturity period, extendable in blocks of 5 years, PPF offers a risk-free investment option. Allowing deposits up to ₹1.5 lakh per year, it currently provides 7.1% pa interest, exempt from income tax. Moreover, the scheme offers liquidity through loan facilities, making it an advisable avenue despite the absence of Section 80C tax benefits.
Life Insurance Premium (LIC)
While tax deduction under Section 80C served as a sweetener, life insurance policies retain their significance for providing financial security in case of untimely death. Despite the new tax regime not offering such tax rebates, individuals are expected to continue opting for life insurance policies for their inherent benefits.
ELSS/ELSS Funds
Equity Linked Savings Scheme (ELSS), with a three-year lock-in period, presents higher risk and potential for greater returns. However, the attractiveness of ELSS diminishes under the new tax regime, as individuals can invest in any regular equity-oriented mutual fund without the three-year lock-in period.
Tax Saving FDs
Fixed Deposits with banks for a minimum of five years, known as Tax Saving FDs, lose their appeal under the new tax regime. The interest received on these FDs is taxable, making them less attractive compared to other investment options available without the tax implications.
National Pension Scheme
A market-linked scheme managed by the government, the National Pension Scheme (NPS) provides an opportunity for higher returns than PPF over the long term. With maturity at the age of 60 years, NPS allows withdrawal of up to 60% of funds in one lump sum, making it an attractive option for those looking to build a pension plan post-retirement.
National Savings Certificate
Offering a fixed income investment with a five-year lock-in period, the National Savings Certificate (NSC) can be availed from any post office. While considered a safe investment with the current interest rate at 7.7%, the interest is taxable. NSC is more suitable for individuals below the taxable limit or with a low marginal tax rate, given its tax implications.
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