In new tax regime, continue with PPF, SCCS, term and health plan

Stop fresh investments in ELSS and Ulip; decision to exit after lockin should depend on performance

A salaried individual can choose between the old and the new tax regime every financial year. The new tax regime levies lower tax rates but doesn’t allow tax deductions. Those who have chosen to go for this default regime need to decide whether to continue with the tax-savings instruments they were investing in earlier.

The basic premise for choosing any product should be its risk-reward and whether it help you meet your financial goals. Tax savings should be a by-product.Public Provident Fund (PPF)

This exempt-exempt- exempt (EEE) scheme, which currently offers 7.1 percent return, remains attractive for building a tax-free corpus, “Although the first E will go away under the new tax regime, the other two Es remain. The interest earned and the maturity amount will continue to be tax-free.”

People who were putting large sums into the Voluntary Provident Fund (VPF) but had to stop due to the imposition of the 25 lakh cap on contributions earning tax-free interest will find the PPF especially useful. Khosla recommends continuing to invest in PPF.

Equity Linked Savings Scheme

ELSS are run like flexi-cap schemes, the only different being that they have a three-year lock in. Since an investor opting for the new tax regime won’t avail of the Section 80C deduction, further investments in these funds should be stopped (unless you feel the lock-in helps you avoid the tendency to exit early).

As for the existing money, “An investor can consider redemption after the three-year lock-in period ends. The money can be invested open-end equity schemes like large-cap mind-ca-cap and flexible-cap funds, depending on the investor’s risk profile.”

If the scheme is doing well, leave your money in the fund until you need it.

Unit Linked Insurance Plans

They invest in a mix of equity and debt. Their returns are market-linked. Here, again, fresh investments should be stopped to avoid the five-year lock-in (unless you want the discipline imposed by the lock-in).

“If you have paid the premium for five years and your purpose for investing in the Ulip was only tax savings, then you may stop investing in it and cash out the fund value, But if the Ulip’s funds are performing well, you may continue with your investments.

Senior Citizens Savings Scheme

Generally, senior citizens invest in SCSS not for the tax deduction but for the higher interest rate: 8.2 percent currently, which is taxable.

Association of Registered Investment Advisors (ARIA), says, “Senior citizens should continue to invest in SCSS as the interest paid on it is usually higher than bank deposits. With the investments limit being increased from 15 lakh to 30 lakh per permanent account number (PAN), senior citizens may increase their investments in it after considering their income-tax slab.”

Sukanya Samriddhi Yojana

It offers an 8 percent tax-free return. Patel says, “Continue investing in it for the benefits of the girl child”

Term and medical insurance

Term insurance is essential for protecting the family’s financial future against the risk of the breadwinner’s early demise.”Continue with your term plan so long as the need for the cover exists, irrespective of the tax regime.”

Medical insurance is another must have. “With medical expenses being already high and rising rapidly, health insurance should be continued with.”

SHOULD YOU KEEP INVESTING IN THESE TAX-SAVERS?

PRODUCT	HOW TO DECIDE
Traditional insurance plans for HINs	Check internal rate of return (IRR). If it is the range of 7% or above (tax-free on maturity), continue
National Pension System	Section 80C benefits will stop under new regime, Contributions under Section 80CCD (2)(NPS offered by employer) will continue to enjoy tax benefits, so don’t stop. Use all Citizens Model if you are okay with lock-in goals is to build retirement corpus.
5-year tax savings fixed deposits (FDs)	Continue with older FDs until maturity. Don’t make fresh investments as normal FDs offer greater flexibility
National Savings Certificate (NSC)	7.7 percent interest rate (taxable) is reasonably attractive. Invest if you are okay with five-year lock-in and periodic rate version.

 

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