PPF, EPF, Sukanya Samriddhi: All you need to know about tax savings schemes

The new tax regime comes with just a couple of deductions. Most significantly, a deduction for investments and expenses eligible under section 80C of up to Rs 1.5L is not available in the new regime. This has left steady investors of PPF, EPF, and other savings instruments in doubt about whether they should continue with these investments or not.

Individuals and HUFs can opt for a new tax regime from FY 2020-21 by giving up about 70 deductions/exemptions. The old regime allows for a deduction at the stage of investment which is unavailable in the new regime. While exemption for interest income and exemption on the maturity proceeds continues to be available in the new regime. So should one continue with these EEE investments? Let’s understand more. 

In the table below, an individual having total income in the bracket Rs 5 to 15 lakh is tax neutral between the existing regime and new tax regime at the value of ‘Deductions’ indicated therein. Simply speaking, if one were to claim deductions as per column 2, tax outgo between the two regimes shall be the same. In a case the total deductions claimed exceed the value as per the ‘Deductions’ limit mentioned below, the old tax regime will be more beneficial, i.e. tax outgo will be lower in the old regime. 

Annual Income

Deductions*

Tax under existing regime

Tax under new regime

1,500,000

250,000

195,000

1,95,000

1,250,000

208,333

130,000

1,30,000

1,000,000

187,500

78,000

78,000

750,000

125,000

39,000

39,000

NOTE: Deductions include standard deduction and all exemptions and deductions

Irrespective of the regime chosen by you, options to invest in EEE instruments such as PPF and EPF continue to be available to the taxpayers. The exemption or deduction on investment may not be available at the time of making investment, however, the other 2 are still available. Therefore, even though the new regime may be preferable, one may continue with these investments. These investments should constitute a certain percentage of your total portfolio. Remember that equity-based investments have a higher potential of return, while the risk is also higher. These EEE investments may be safer albeit with lower returns (and no tax outgo on withdrawal) as compared to equity investments. Therefore, their place in your overall portfolio still is very relevant and important. Besides, salaried employees have an option to choose between the two regimes at the time of filing their taxes, and therefore, you may still become eligible in a certain year to claim them. 

EEE investments and tax exemptions consist of: 

a. Public Provident Fund: The investment in a PPF is tax-exempt under section 80C. The interest and maturity proceeds are also tax-exempt.

b. Employees Provident Fund including Voluntary Provident Fund contributions: The contribution made by you to the EPF including any voluntary contribution is also eligible for tax deduction under section 80C up to a maximum of Rs 1.5L. The interest and withdrawals from your EPF account are tax-exempt upon completion of five years of continuous service.

c. Life insurance policy premium: The premium payment is eligible for tax deduction subject to the premium not exceeding 10% of the sum assured on the policy. In case of policies taken before 31 March 2012, the premium should not exceed 20% of the sum assured. The maturity value including bonus allocated on the policy is tax-exempt.

d. Sukanya Samriddhi Scheme: The deposits made under the scheme are eligible for a tax deduction. The interest and maturity proceeds are also exempt from tax.

e. National Pension Scheme: The contribution to NPS is eligible for tax deduction under the overall limit of section 80C. You can also claim an additional deduction of Rs 50,000 under section 80CCD(1B). The deduction is limited to 10% of the salary in the case of an employee and 20% of the gross total income in other cases. Upon retirement, you can withdraw up to 60% of the corpus tax-exempt.

f. National Savings Certificate: The investment in an NSC is eligible for a tax deduction. The interest accrued each year except the last year is also eligible for a tax deduction. Upon maturity, only the last year’s interest is taxable.

g. Senior citizens savings scheme: The investment in SCSS is eligible for tax deduction under section 80C. The interest earned is eligible for a tax deduction up to Rs 50,000 under section 80TTB.

Tax-free returns and maturity proceeds are available only if you make an investment in any of the above-listed investments.  

The new tax regime does not prohibit making any of the above investments. In case you opt for the new regime, you can still continue paying your insurance policy premium or depositing money in a PPF account. Tax-exemption in the future on your returns and maturity proceeds is still available. The investments become future tax-free savings without immediate tax benefits. One must look at these investments without the tax lens. 

Under the new tax regime, an individual should evaluate their financial goals and overall portfolio. A choice of stopping tax-saving investments in the new tax regime can be costly in terms of loss of future tax-free returns and the regularity of working towards a slow and steadily building  corpus.

Archit Gupta is Founder and CEO - ClearTax. Views are his own.