Forget tax exemptions, you still need these investments for your financial well-being

The new tax structure can be availed if taxpayer foregoes exemptions and deductions, but does that mean you shouldn’t make those investments?

Kumar Shankar Roy Feb 9, 2020

Tax exemptionFinance Minister Nirmala Sitharaman has proposed a ‘simpler’ income tax regime that offers lower rates to taxpayers if they do not use a bunch of exemptions and deductions to lower their taxable income. You can always choose to stay with the older tax regime which offers you the flexibility to use exemptions and deductions to lower the taxable income, but those do not offer the lower rates in the new structure. Additionally, there is a question mark on how long income tax sops will remain. This is because the Finance Minister in a post-budget press meet clearly said that the government intends to remove all income tax exemptions in the long run. That means you can still use tax exemptions and deductions but no one is sure whether these will stay.

Ideally, tax exemptions and deductions should not be the reason why you invest in your financial well-being. But, middle-class Indians like the two-in-one benefits that investments bring with tax edge. Over the years, tax savings have been packaged well with different investment products. Change is hard, and it is harder if that means your investment’s tax-saving quality becomes useless. The truth is tax exemptions may be going, but you still need a few key investments for your financial well-being. RupeeIQ tells you why.

Also read: Budget 2020: Exemptions you can still claim even if you opt for new income tax regime

National Savings Certificate

The 5-year National Savings Certificate or NSC, a post office savings product, currently offers 7.9% per annum interest. This is a government-backed instrument. Compare the NSC interest rate to SBI’s 5 year fixed deposit that offers 6% per annum with effect from February 10. Clearly, the NSC gives you better returns than bank deposits that offer much less. You can continue to use the NSC as a debt investment even without its tax exemptions. However, the 7.9% interest rate in NSC can change in the future since the interest rates on small savings schemes, including NSC, Public Provident Fund, etc., are liable to be revised by the government each quarter.

Life insurance

Life insurance premium payments today can be claimed as deduction under Section 80C subject to a maximum limit of Rs 1,50,000. Life insurance is best bought through term insurance which is the cheapest or through the return of term insurance premium products, which is slightly costlier. Life insurance, with or without tax benefit, remains critical for those with financial dependants. Yes, it is an investment. This is the cheapest product that can shield the financial future of your family and loved ones even when you are no longer around to take care of them personally. Given that term insurance rates are very affordable, anyone today can buy a large cover of Rs 1 crore. Do not stop life insurance premiums if you cannot take advantage of tax exemption.

Health cover

Like life insurance, health insurance (also popularly known as mediclaim) is an investment that you cannot do without. Yes, it is an investment because a small ‘investment’ like health insurance can protect you against massive out-of-your-pocket hospital bills in case of an emergency. Currently, under Section 80D you are allowed to claim a deduction up to Rs 25,000 per financial year for medical insurance premium installments. The premium should be for you, your spouse, and dependent children. These include top-up medical insurance premiums as well. Even with no tax break, health insurance has no substitute. It is the most affordable way to protect your financial well-being directly from the cost of medical exigencies and indirectly income disruptions due to medical ailments.

ELSS edge

Equity Linked Savings Scheme (ELSS) are tax-saving mutual fund products. They are preferred by many for tax-savings and investment return potential due to equity exposure. The tax break is available up to Rs 1.5 lakh per year under Section 80C. Imagine a world where ELSS has no tax benefit. ELSS products offer the shortest lock-in of three years compared to Section 80C alternatives like PPF (15 years). Different studies have conclusively proved that ELSS has much higher return potential as well compared to other Section 80C alternative options.

If ELSS has no tax advantage, then it will still remain a great long-term investment product. Yes, ELSS will then just be any other mutual fund but given that retail investors usually invest in ELSS, fund managers adopt a cautious approach for ELSS portfolios. Though the returns are market-linked, ELSS makes it up for that by offering higher potential. For those who would still prefer to invest in PPF even when the tax edge would no longer exist, allocate 50% of investments in ELSS. Over a long period, you will understand why PPF and ELSS combination is better than simply sticking to PPF.

The Senior Citizens’ Savings Scheme (SCSS)

For senior citizens (above the age of 50), SCSS, even without Section 80C tax benefit, continues to beat five-year bank deposits for senior citizens. SBI FD offers 6.5% per annum for five years. In comparison, SCSS offers a maximum interest rate of 8.6% per year. Thus on a post-tax basis, SCSS wins against bank FDs hand down. SCSS is a Government of India product, which gives it the same sovereign backing that PSU bank deposits enjoy. Under the current SCSS norms, a senior citizen can deposit a maximum Rs 15 lakh and enjoy the 8.6% interest rate. This means the maturity value at the end of the 5-year tenure will be Rs 22.65 lakh. That’s like offering a decent risk-free return of above Rs 10,000 per month.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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