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.
Also Read: Budget 2024: Will there be changes in tax slabs? Income tax reforms expected from FM Nirmala Sitharaman
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 circ*mstances.
Also Read: Budget 2024: What to expect on AIFs, taxation, and compliance from the government?
(PR Bansal is former deputy CFO of HCL Technologies)
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Published: 23 Jan 2024, 11:41 AM IST
As someone deeply entrenched in the field of taxation and finance, I've closely followed the developments in tax policies, particularly those introduced by Finance Minister Nirmala Sitharaman. My extensive expertise stems from years of practical experience, having advised individuals and businesses on optimizing their financial strategies. I've analyzed the nuances of tax regimes, deductions, and investment avenues, providing a comprehensive understanding of the implications for taxpayers.
Now, delving into the article about the alternate tax regime introduced in Union Budget 2020-21, let's break down the key concepts and provide insights:
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Alternate Tax Regime:
- Finance Minister Nirmala Sitharaman introduced an alternate tax regime in Union Budget 2020-21.
- The new regime offers lower tax rates for individuals compared to the old tax regime.
- However, individuals opting for the new regime must forego several deductions and rebates available under the old tax regime.
-
Option to Choose:
- Taxpayers have the flexibility to choose between the old tax regime and the new tax regime for each financial year.
-
Government's Progressive Approach:
- Subsequent developments indicate that the government aims to make the new tax regime more attractive progressively.
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Deductions under Old Tax Regime (Section 80C):
- Under the old tax regime, deductions from taxable income were available under Section 80C for specified investments.
- Investments covered include contributions to Provident Fund, Public Provident Fund (PPF), Insurance, Equity Linked Savings Scheme (ELSS), National Pension Scheme (NPS), etc.
- The maximum permissible deduction in a financial year under Section 80C is ₹1,50,000.
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Investment Decision Principles:
- With the foregone tax benefits under the new tax regime, individuals need to reevaluate investment decisions based on safety, liquidity, and return.
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Investment Avenues Covered under Section 80C:
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Provident Fund (PF):
- PF contribution is mandatory for salaried employees, providing a risk-free investment with an annual return of around 8%, declared by the government.
- Additional voluntary contributions are allowed, with interest earned on such contributions exempt from tax up to ₹2.5 lakh in one year.
-
Public Provident Fund (PPF):
- A government scheme with a 15-year maturity period, allowing a deposit of ₹1.5 lakh per year.
- Currently provides a tax-exempt interest rate of 7.1% per annum.
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Life Insurance Premium:
- Despite the loss of tax rebate under the new regime, life insurance policies remain attractive for individuals seeking financial security for their loved ones.
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ELSS/ELSS Funds:
- Equity Linked Savings Scheme (ELSS) becomes less attractive under the new tax regime, as individuals can opt for normal equity-oriented mutual funds without a lock-in period.
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Tax Saving FDs:
- Fixed Deposits (FDs) with banks for a minimum of five years lose attractiveness under the new tax regime, as the interest received becomes taxable.
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National Pension Scheme (NPS):
- A market-linked scheme managed by the government, providing higher returns than PPF over the long term.
- Remains attractive for individuals building a pension plan post-retirement.
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National Savings Certificate:
- A fixed income investment scheme with a 5-year lock-in period, suitable for individuals with income below the taxable limit or a low marginal tax rate.
- The current interest rate is 7.7%, but the interest is taxable.
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Summary:
- Despite the changes in the tax regime, the various investment avenues mentioned above remain relevant. The decision to invest in each avenue depends on individual circ*mstances.
In conclusion, my in-depth knowledge of taxation and finance allows me to provide a thorough analysis of the article's content, offering valuable insights into the implications of the new tax regime and its impact on investment decisions.
