For taxpayers who wish to stick to the old tax regime, tax-saving instruments will retain their charm. As for individuals who chose the new tax regime, tax savings instruments may lose their sheen a tad. To understand both scenarios, we need to quickly glean through the rebates offered in both old and new regimes.
Doing this will help us figure out why one regime encourages taxpayers to invest in tax-saving instruments more than the other.
Old Tax Regime Vs. New Tax Regime
The 2023 Union Budget raised the income tax exemption from Rs. 2.5 lakhs to Rs. 3 lakhs for the old regime, and the rebate from Rs. 5 lakhs to Rs. 7 lakhs for the new regime. A key thing to remember is that the old tax regime is where you reveal your income and offset it with savings and investments in tax-saving instruments to calculate your actual income – on which you pay tax as per the slabs.
So, if taxpayers stick to the old regime, they are eligible for tax rebates only after declaring their savings of up to Rs. 1.5 lakhs under Section 80C.
No such provision exists if one chooses to pay tax using the new regime, where taxpayers are exempt from paying any income tax on an income up to Rs. 7 lakhs. After which, they are taxed according to the slabs mentioned by the government. Here, they don’t show savings or investments as they does not matter.
Should You Invest in Tax Saving Instruments Even If You File Under the New Tax Regime?
Absolutely yes! Know that tax-saving should not be the only factor to consider when investing in instruments that fall in the purview of Section 80C. Tax-saving Instruments such as ELSS, PPF, NPS, etc., are not only popular because you can claim a tax rebate by investing in them but they are also an excellent source for safely creating substantial long-term wealth. While PPF offers guaranteed returns, ELSS and NPS are considered some of the most lucrative market-linked investment vehicles. Needless to say, they have the potential to earn investors higher returns.
Another benefit is that all these instruments come with a short lock-in period, which ensures you stay invested during the highs and lows of the market. This strategy ultimately earns you a sizeable return, more than most fixed deposits provide.
While PPF and NPS are popular with both types of taxpayers, not a lot is understood about ELSS. Find out more about this category of mutual funds below:.
What are ELSS Mutual Funds?
Equity Linked Mutual Funds, or ELSS funds, invest 80% of their corpus in equity-linked instruments. In addition, they diversify their corpus in different types of equity-oriented instruments across market capitalisations and sectors.
Benefits of ELSS Other than Them Being Tax Savers
Even if we remove the tax-saving advantage of ELSS for taxpayers who will pay taxes this year as per the new regime, this instrument is a worthy investment. Here’s why:
As compared to other instruments, ELSS has a shorter lock-in period of only 3 years. During this time, your corpus remains invested in equities. This is unlike the NPS, which is also market-linked but has a much longer lock-in duration.
Since ELSS invests in market-linked equities, it has the potential to earn high returns. Unlike other 80C investment options such as PPF or FD, where the returns are fixed. ELSS has the potential to generate significantly higher wealth in a medium to long-term investment horizon.
Low Investment Amount
Most ELSS funds accept investments of as low as Rs. 500. This is especially useful if you are a new investor and want to test the waters before diving in. So, instead of investing a lump sum in ELSS, you can start with a SIP that invests in equities for as low as Rs. 500.
In The End
Tax-saving instruments are excellent investments in terms of earning returns and diversifying your portfolio.
Want some more advice before investing in them? Well, then reach out to the financial experts at Tata Capital Wealth. Our team has the expertise to help you pick an optimal investment basket after evaluating your investment horizon, risk appetite and financial goals.
To learn more about our sought-after financial services, visit our website today!