Come the beginning of every financial year, office goers would surely receive mail from HR asking for their plans on tax-saving investments for the year. Accordingly, TDS from salary would be calculated and deducted every month. While you may have given the standard response each year — that you will avail options such as PPF, insurance premium, ELSS and so on, this year — you will have to plan your savings and investments more actively, thanks to the recent Budget announcement.
From 2023-24 (ie assessment year or AY 2024-25), the new tax regime — under which you can bypass these popular 80C investments for being taxed at a different slab rate — would be the ‘default’ regime. If you find that you will be better off under the new regime or don’t actively opt for the old regime, your 80C investments won’t matter at all. If that is the case, should you stop investing in all these instruments? Not really. Here’s what you can do.
What to give up
It is often said that when you are young and can take higher risk, you should maximise equity investments. While this is true, ELSS is one investment you can let go of in the tax-saving basket. For one, ELSS is not the only way to take exposure to equities and there are plenty of equity mutual fund options outside this. Two, neither are ELSS portfolios greatly different from other diversified equity funds nor are the returns.
Data from Value Research (as of May 4) shows that average returns of ELSS funds in the last one-, three-, five- and 10-year periods stand at 9.3, 25.8, 10.5 and 14.6 per cent respectively. Funds in the flexicap category show very similar returns – 8.3, 24.5, 10.6 and 14 per cent respectively. Over three, five, 10 years, funds in the ‘large & midcap’ category have returned higher than ELSS. Over five and 10 years, even actively managed large-cap funds have outperformed ELSS.
Three, over the long term, the best equity funds beat fixed income returns and inflation by a good margin, hence there is no need of a kicker in the form of 80C deduction to enhance post-tax returns for this instrument.
Next, if you have the habit of regularly investing in tax saving FDs, keep in mind they are not suitable at all times. These FDs compulsorily carry a five-year tenure at times when the interest rates are low; locking into five-year FDs may not be prudent, though one can argue that post-tax yields will be higher because of the 80C benefit. To get the best from FDs, you need to be nimble on your feet, following rate cycles, inflation (you need positive real returns) and taking cognisance of reinvestment risk before choosing tenures.
Even such times as today, when interest rates are at a high, expected to plateau and a five-year lock in doesn’t seem a bad idea, there may be other 80C investments which give higher returns. Today, NSC with the same five-year tenure gives 7.7 per cent return, while five-year Post office deposits, which qualify for 80C benefits, give 7.5 per cent. Data from Bank Bazaar shows that the five-year tax saving FDs today across key public and private sector banks offer only 6.2 to 7.6 per cent. Hence, this may always not make for a good option.
Finally, if you had prioritised ULIPs and other insurance-cum-investment plans which have higher premium outgo over pure term insurance, this is a good opportunity to take a relook. Budget 2021 made maturity proceeds of ULIPs where annual premium is over ₹2.5 lakh, taxable. Taxation will be similar to that of equity mutual funds. A recent bl.portfolio story shows that many equity oriented ULIPs across market cap categories are unable to beat benchmarks. Similarly, Budget 2023 has made proceeds from life insurance policies taxable if annual premium exceeds ₹5 lakh. Returns have been only at 4-6 per cent levels for most insurance-cum-investment products, but the tax-free status of maturity proceeds was a big draw. Now, no longer. Opt for pure term insurance to cover risk, irrespective of the tax regime you choose.
What to keep
There are two tax-saving investments which are worth continuing even if you opt for the new regime. First, is there a sovereign guaranteed fixed income instrument, where interest is tax free and also beats inflation? The answer is PPF. As outlined in a recent bl.portfolio Big Story, PPF returns have beaten CPI inflation in nine of the last 10 years and returns can be expected to better long-term inflation rate, given that the returns are pegged to the yield on five-year government securities. Thus, PPF is a must have in your portfolio.
Additional tax benefit of ₹50,000 over and above ₹1.5 lakh is available for NPS investments in the old regime. If you did open an NPS account some years back and are looking to move to the new regime now, fret not. Over the long term of 10 years, schemes C and G — the debt NPS funds — have delivered 8-8.5 per cent returns for investors (as on April 28, from NPS Trust) as against comparable mutual fund categories — corporate bond and gilt funds — which have delivered average returns of 7.1-7.3 per cent (as on May 4, Value Research). Scheme E – the equity NPS fund has returned as much as large-cap funds over the last 10 years.
Of course, various other mutual fund categories can give higher returns for higher risk but for those who are not saving ( or are only partly saving) through mutual funds for your retirement, the NPS still remains a worthy addition to your investment basket, whether investments enjoy tax deduction or not.
Points to note
While you may have to inform your employer now about the choice of your regime, for the purpose of the tax department, it is enough if you inform them when filing the return. However, you must ensure that you have funds to meet a lumpsum tax outgo additionally in case the TDS cuts from your salary end up being lower because of a different choice made now (May 2023) vs. the time of filing the return for this financial year (April-July 2024).
Secondly, though the new regime will be the ‘default’ one, the option to choose the tax regime is available every year for individuals ( ie for assessees without business/professional income). If you want to actively choose the favourable regime each year, this is the chance to reset your tax-saving portfolio to get maximum bang for the buck.