Before opting for the new income tax regime introduced in the Budget 2020, you must know its benefits offered by the government. An important point to note is that no deductions or exemptions will be allowed to the taxpayers opting for the new reduced tax slabs.
You must be wondering why you should invest in a tax-saving instrument when there are no benefits. It’s time to reconsider your financial planning and make adjustments based on your long-term financial goals. It may not be a good idea to commit yourself to any long-term investment that requires a yearly contribution with the motive of saving your taxes.
Also Read: 7 Tips to Earn Better Returns From Mutual Funds Investments
Here is the list of tax-saving products that do not require a mandatory yearly contribution or need a small amount every year to keep the account operative:
- Equity-Linked Savings Scheme (ELSS): ELSS funds are nothing but diversified mutual funds. You can avail a deduction on the amount invested in ELSS of up to Rs 1.5 lakh under section 80C. Since there are no benefits available in the new tax regime, there are some features of ELSS that should not be overlooked. This scheme offers the lowest lock-in period among all the tax-saving investment options. Also, you don’t have to invest the same or any amount every year in ELSS. The returns offered by such a scheme is 12%-15% approx., and any gains from its transfer are taxed at 10%, provided the gains exceed Rs 1 lakh in a financial year.
- Public Provident Fund (PPF): Another investment option is to invest in PPF. This scheme is backed by the government, currently offering an interest rate of 7.9% per annum. PPF comes with a lock-in period of 15 years, and it can be extended in a block of five years. You can invest a minimum of Rs 500 and a maximum of Rs 1.5 lakh per year as an initial investment and later continue with Rs 500 per year to keep the PPF account active. The most important feature to look for while investing in PPF is its maturity proceeds. The withdrawals are tax-free.
- Sukanya Samridhi Yojana (SSY): You should invest in SSY if you are a parent of a girl child. This is a social welfare tax-saving scheme, backed by the government, meant for up to two girl children. Currently, the interest rate offered by SSY is 8.4% per annum, which is compounded annually. You can open an account with a minimum of Rs 250 and get a deduction on the amount invested in a year under section 80C of up to Rs 1.5 lakh. The account matures after 21 years from the date of opening the account. This investment helps you build a corpus for your daughter’s higher education, marriage and much more. The best feature the SSY offers is that the interest earned and maturity amount received are exempted from tax.
- National Savings Certificates (NSCs): You are not required to invest in NSC every year mandatorily. You can start the investment with a minimum of Rs 100, and it has no upper limit. Any contribution made in a particular financial year qualifies for a deduction under section 80C. At present, it offers an interest rate of 7.9% per annum and the interest accrued is reinvested and qualifies for a tax deduction.
- Bank Fixed Deposits: Bank FDs have a lock-in period of five years, and there is no mandatory requirement to invest every year. You can park a lump sum amount and let it grow over five years. The investment also qualifies for a tax deduction under section 80C and is governed by the RBI. The interest rates offered are approximately between 6% and 8% per annum.
You must evaluate all the financial products, compare them with others, and only then invest your money. The product must fit your long-term financial goals and provide security instead of offering tax incentives only. Decide and act wisely.
For any clarifications/feedback on the topic, please contact the writer at komal.chawla@cleartax.in
I am an aspiring Chartered Accountant. I spend most of my free time dredging through the various Indian finance subreddits. I am a semi-professional bowler with a high strike rate every time there is a new tax reform!
