New Tax Regime: Why should you still opt for tax-saving instruments such as PPF, NPS, NSC? | Mint

In FY 2023-24, the new tax regime became a default regime. This shift has led many taxpayers to wonder whether traditional tax-saving investments such as PPF (Public Provident Fund), NSC (National Savings Certificate), post office saving scheme and NPS (National Pension System) are still relevant for the purpose of investment.

The tax-saving instruments, which were considered to be needed, are losing their charm since the current regime has withdrawn several significant deductions under Sections 80C, 80D, and 80CCD(1). It is pertinent to ask whether such assets are still an effective tool for wealth creation or is it time to look for alternatives?

Range of benefits

No doubt, the recent tax regime has changed the scenario of tax-saving investments and hence reduced their relevance for many taxpayers. Experts are not in total agreement on this point. The financial products, PPF, NSC, and NPS, remain part of an investor’s overall financial strategy, although the tax-saving incentive is gone.

According to an individual’s needs, tax-saving tools can be used for risk management, retirement planning, or maintaining a diversified portfolio.

Conservative investors

Swapnil Aggarwal, Director of VSRK Capital, observes that the recent tax policy changes have diminished the attractiveness of traditional savings schemes such as PPF and NSC for tax-saving purposes. However, he believes these instruments still have a place for conservative investors seeking low-risk options.

“The recent tax policy changes eliminating rebates under sections 80C, 80D, and 80CCD(1) have reduced the allure of schemes like PPF and NSC for taxpayers. While these instruments still provide guaranteed returns and low-risk benefits, they primarily appeal to conservative investors. This shift creates an opportune moment for investors to re-evaluate their portfolios and consider diversifying into higher-return options such as equity. A balanced approach focusing on long-term financial objectives, rather than merely seeking tax-saving benefits, can lead to more robust wealth creation. Diversification not only enhances growth potential but also aligns investments with evolving financial goals.”

Aggarwal encourages investors to move away from the mindset of investing solely for tax savings. Instead, he advocates for a more diversified investment strategy that aligns with long-term goals, including equity-based investments that can offer higher returns.

Other benefits

Manoj Trivedi, Director of Strategy at Maxiom Wealth, offers a clear perspective on the continued relevance of tax-saving instruments. He points out that these instruments are still relevant. “For example, PPF gives a very high post-tax return from a very safe borrower. It is also an effective aid for retirement planning. Similarly, taking life insurance is very critical. Hence, these instruments are not irrelevant. We need to invest based on the investor’s needs,” he says.

While the new tax regime may have diminished the immediate tax incentives, Trivedi argues that the decision to invest in these instruments should be driven by the investor’s broader financial goals, including retirement planning and risk tolerance.

Financial goals

Sandeep Agrawal, Director and Founder of Teamlease Regtech, highlights the flexibility offered by the new tax regime. He points out that the elimination of compulsory tax-saving investments means that individuals can now make choices based on their personal financial goals, rather than just aiming to save on taxes.

“The new tax regime offers individuals the flexibility to choose investments that align more closely with their financial goals, risk appetite, and liquidity needs, without the compulsion of tax-saving motives. Unlike the old regime, which incentivized investments through deductions under sections like 80C, 80D, and 80CCD(1), the new regime allows for a more personalized and strategic approach to wealth generation. Investors can now focus on options with better returns or withdrawal flexibility, rather than locking funds into tax-saving schemes.”

Agrawal underscores that the new tax regime enables individuals to focus on investment strategies that best suit their long-term wealth generation, rather than just looking for instruments that offer tax relief.

Can opt for old regime

As a counterpoint, one can even opt for the old tax regime only to optimise the small savings instruments.

Sudhir Kaushik, Co-Founder & CEO of Taxspanner (a subsidiary of Zaggle) suggests that taxpayers who wish to build long-term wealth without being penalised should still consider tax-saving investments such as ELSS, NPS, and ULIPs under the old tax regime. These options not only reduce tax liability but also have the potential for wealth creation.

Through this new tax regime, investors will get a chance to reassess their holdings and make investments which would be aligned more with their financial circumstances, risk tolerance, and personal objectives.

In the due course, there would be better outcomes with such personalised and deliberate approach towards wealth creation by investing in the financial instruments that assure returns.