The new income tax regime offers only a large rebate of Rs 7 lakh. Though the standard deduction was small under the old income tax regime, it allowed extra tax deductions on investments under Section 80 C, HRA, insurance premiums, among other things.
Many mutual advisors and financial planners say the government is moving towards implementing the new tax regime and it is only a matter of time before most taxpayers shift to it. Subir Jha,founder, Buckspeak, a Hyderabad-based wealth management firm, says it would make a lot of sense for many investors to opt for the new tax regime. He believes that though the decision to switch to the new tax regime would be decided on a case to case basis, many young taxpayers are likely to opt for the new tax regime. Mukund Sheshadri, a financial planner based in Mumbai, also believes that young taxpayers are likely to choose the new tax regime as it is easy to follow. “Though I didn’t get any queries about this I think many people would opt for it,” he says.
Financial planners like him believe that the casualty of the trend would be tax saving investments, especially the ELSS funds. “I clearly see the new tax regime as a big blow for ELSS funds. The category was far more relevant to the younger workforce, who generally would be the biggest ‘beneficiaries’ of the new tax regime,” says Subir Jha. He says the taxpayers in the higher tax brackets had their EPFs, home loan principal, insurances and above all, their kids’ tuition fees to claim deductions. This means they hardly had any appetite for ELSS.
Why are experts worried about how this might impact the investor behaviour? The old income tax regime offered tax deductions for certain investments that served as an incentive to invest in them. Many investors would start investing in ELSS funds only because they could claim tax deductions on it. With the incentive gone, will investors still continue with their investments? Sheshadri says there is always a fear that young investors would spend more. “I remember how investors started investing in infrastructure funds when the government offered extra tax benefits. Once the benefit was taken away, they stopped investing that extra amount,” says Sheshadri.
“Investors hate lock-ins and would obviously choose funds without lock-ins. However, a bigger fear is that they would invest less, thereby definitely impacting their long term corpus,” says Subir Jha. Investments that qualify for tax deductions under section 80C have mandatory lock-in periods. ELSS funds have a mandatory lock-in period of three years. This is why many mutual fund advisors and financial planners believed that ELSS funds were an ideal stepping stone into the stock market. Many mutual fund investors used to start with ELSS funds and after they experience the volatility and high returns associated with the equity market, they would start investing in equities in a serious manner.
If you are planning to shift to the new income tax rate regime, you should be extremely careful not to spend extra money. Always remember to save and invest. You should stick to your investment plan and make sure that you invest the required amount every month to create the corpus for your various financial goals. “Always remember that the tax deduction was incidental. Even if there is no tax incentive, you need to invest to take care of your various goals. If you don’t, there will be serious consequences,” says Sheshadri. Keep in mind that Rs 1.5 lakh in ELSS every year can help you to make a large corpus in 20 years. Assuming an annual return of 12%, it would help you to create a corpus of Rs 1.21 crore in 20 years. Checklist
*Always work with the real numbers before deciding to switch to the new income tax regime
*Don’t spend the entire money because you don’t have to do any tax planning
*always stick to your savings and investments targets
*Invest in equity mutual funds to take are of your long-term goals, as equities offer superior returns
*If you want to play it safe, you can also have a mixed portfolio to take care of your goals. However, always rebalance the portfolio every year
