Budget 2020: Invest to optimise wealth creation, not for tax saving

Many tax-saving financial products will remain relevant even when you do not avail of the tax benefit on them

After the Budget, many investors will shift to the new regime under which they do not need to make any tax-saving investments. In this new scenario, investors should focus on products that maximise their wealth, instead of being forced (as was the case in the old regime) to choose financial products based on tax-saving considerations.

Investors will now be free to make better choices. As Balwant Jain, a Mumbai-based tax and investment expert puts it: “When you make investment decisions with only tax saving in mind, your choices get biased and there’s no optimisation.”

Mis-selling should reduce: One clear advantage of the new regime will be that the mis-selling of products during the January-March tax-saving season should reduce. Many investors were sold insurance-cum-investment products just because they enabled tax saving. The insurance cover on these products was generally inadequate. And these products mostly invest in fixed-income instruments, so the return on them also did not go beyond 4-5 per cent annually. Exiting these products was a costly proposition.

Avoid lock-in: Another benefit of not having to invest for tax-saving will be that investors will be able to invest in products that come without a lock-in. “A highly conservative investor would earlier invest in five-year tax-saving fixed deposits. Now he will be free to put his money in any normal fixed deposit or recurring deposit that offers the best return,” says Ankur Kapur, managing partner, Plutus Capital.

Many categories of investors, such as retirees, too invested in tax-saving products to reduce their tax liability even though these investments did not make much sense for them from a financial-planning point of view.   

Decisions unduly dominated by tax considerations: Sometimes, financial decisions were dominated purely by tax considerations. “Many people who have taken home loans do not prepay them even when they have surpluses, just to be able to avail of tax deductions,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisers. But when they do not prepay, they end up paying a higher amount of interest payment to the lender. “People who have opted for the new tax regime will now be able to go ahead and prepay,” adds Dhawan.

Similarly, people often chose equity-linked saving schemes (ELSS) because they combined the returns of equities and also offered tax saving. But they are not necessarily superior in terms of return. Now, an investor will be free to pick any quality diversified-equity fund that fits into his portfolio.  

Benefit of enforced saving will be lost: The imperative to invest for tax-saving did have the benefit that it led to enforced saving. This is particularly beneficial for those who are at the start of their careers. Now, the onus will be entirely on the individual to save and invest to meet his future goals. The tax regime will not nudge him to do so. Those who shift to the new regime should aim to save and invest at least 30 per cent of their take-home salary.

Many “tax-savers” will remain relevant: Many products on which tax benefits are available have merits even in the new regime. People should not stop buying them just because they will not avail of any tax benefit on them. Term insurance, on which benefit is available under Section 80C, still needs to be purchased. A Rs 5-10 lakh floater health insurance cover will still have to be purchased by a family, even if it is not availing the Section 80D benefit. National Pension System (NPS), on which an additional benefit of Rs 50,000 is available under Section 80CCD (1B), remains a good, low-cost product that locks in your savings for retirement, so that it does not get spent on other needs.  “Investment products should be chosen based on whether they are suitable for fulfilling your financial goals. Even if you choose the new regime, continue to invest in equity and debt mutual funds, Public Provident Fund and Voluntary Provident Fund because these products give tax-efficient returns,” says Mrin Agarwal, Founder Director, Finsafe.   

Income: Rs 15,00,000	Taxability
Particulars	Existing	New
Basic Salary

7,50,000  7,50,000 House Rent Allowance 3,00,000  3,00,000 

LTA

50,000  50,000 Childrens education allowance 2,400  2,400 Conveyance 19,200  19,200

Food Voucher

13,200  13,200 Special Allowance 3,65,200  3,65,200 Total Salary   15,00,000    15,00,000

HRA Exemption

(2,25,000) - Standard Deduction (50,000) -  LTA exemption (50,000) - Childrens education allowance (2,400) - Food Voucher (13,200) - Salary Income   11,59,400    15,00,000

Income under the head House Property (limited to Rs 2 lakh)

(2,00,000) - Total income 9,59,400  15,00,000

Deductions     

    u/s 80C - PF (90,000) - u/s 80C - others (60,000) - u/s 80-D (25,000) - u/s 80CCD (1B) - NPS (50,000) - Taxable Income 7,34,400  15,00,000 Income Tax 61,755  1,95,000 HRA exemption

HRA received   

3,00,000 Rent less 10% of basic pay  225,000 40% of salary 3,00,000 Least of above is exempt 225,000 All figures in rupees; HRA Assumption: non-metro location

Income: Rs 7,50,000	Taxability
Particulars	Existing	New
Basic Salary	3,75,000	3,75,000
House Rent Allowance	1,50,000	1,50,000
LTA	50,000	50,000
Childrens education allowance	2,400	2,400
Food Voucher	13,200	13,200
Special Allowance	1,59,400	1,59,400
Total Salary	7,50,000	7,50,000
HRA Exemption	(82,500)	-
Standard Deduction	(50,000)	-
LTA exemption	(15,000)	-
Childrens education allowance	(2,400)	-
Food Voucher	(13,200)	-
Salary Income	5,86,900	7,50,000
Income under the head House Property (limited to Rs 2 lakh)	(50,000)	-
Total income	5,36,900	7,50,000
Deductions

    u/s 80C - PF (45,000) - u/s 80C - others - - u/s 80-D - - u/s 80CCD (1B) - NPS - - Taxable Income 4,91,900  7,50,000 Income Tax 12,095 39,000 Rebate u/s 87A 12,095 - Total tax liability  - 39,000 HRA exemption HRA received    1,50,000 Rent less 10% of basic pay  82,000 40% of salary 1,50,000 Least of above is exempt 82,000 All figures in rupees; HRA Assumption: non-metro location