5 tax-saving investments that will lose their charm under the new tax regime

• A good investment should be evaluated on two parameters – return on investment, and the tax treatment of such return.
  
• Tax deductions on investments will not be available if one opts for the new tax regime.
  
• Investments like ELSS, PPF, and tax-saving fixed deposits are likely to lose their sheen.
  

The old tax regime offered several tax deductions that helped bring down one’s taxable income, and save on taxes. With the Government revising the tax slabs under the new tax regime, and making it the default tax regime in budget 2023-24, the new regime has become more attractive to certain taxpayers as they can save more on taxes by opting for it.

“A good investment should be evaluated on two parameters – return on investment, and the tax treatment of such return. The tax implications of an investment has three layers – at the time of investment, at the time of earnings, and at the time of withdrawal. The tax treatment for the last two layers almost remains the same in both the old and new tax regimes,” says Naveen Wadhwa, deputy general manager at Taxmann, an online source of tax and law-related information.

A lot of investments were popular due to the available tax deductions, and section 80C provided deductions of up to ₹1.5 lakh for various investments. With deductions under section 80C no longer available under the new tax regime, many popular tax-saving options have become less attractive. Let us take a look at these.

Public Provident Fund (PPF)

PPF was one of the most popular investments under section 80C as it was government backed and fell under the EEE category. This meant that the investment made, interest accrued and payout at maturity were all tax exempt. However, under the new tax regime, any amount invested in PPF will not be eligible for tax exemption under section 80C. “This change might have affected the attractiveness of PPF for certain investors,” says Atul Sharma, founder of Lex N Tax, a tax consultancy firm.

Equity-Linked Savings Scheme (ELSS)

ELSS funds were a very popular deduction under section 80C, since they had a lock-in period of 3 years, and also provided market-linked returns. “Since the deduction under section 80C is not allowed under the new regime, ELSS investments have become less popular,” says Sharma.

Tax-saving fixed deposits

FDs have been a popular investment choice because they offer fixed returns. “Tax-saving fixed deposits are long-term deposits with a lock-in period of five years, offering tax benefits under section 80C of the Income Tax Act,” says Sharma. However, since 80C deductions are not available under the new tax regime, the appeal of tax-saving FDs have reduced, especially because without tax savings at the time of investments, the real rate of return on FDs will be even lower.

Endowment plans

Certain types of life insurance policies, such as traditional endowment plans, have witnessed a decline in popularity due to the new tax regime. Even though they were not a wise investment option, they were popular because of the guaranteed returns and the tax benefits they offered under section 80C. Now, with that gone under the new tax regime, endowment plans have lost their sheen.

National Savings Certificate (NSC)

With no tax deduction available under section 80C if one opts for the new tax regime, NSC becomes taxable as per the individual's income tax slab rate – thus making it less popular as a tax-saving investment.