Investors' Hangout: Reminder 1 - Tax-saving investment

Let's start today's discussion with a very basic question: what are the key differences between the new and old tax regimes and who should opt for what?

When it comes to paying taxes, there is a new tax regime and the old tax regime and the new tax regime as per the government has become the default thing that will apply to you. The key difference between the new and old regimes is that in the old regime, you have nearly 70 kinds of exemptions possible. Variety of it, mainly what you look at, Section 80C, the Rs 1.5 lakh which you will invest, was deductible from your income for computing taxes, likewise, Rs 2 lakh interest paid on home loan. So, if you have all those things planned with the old regime in your mind, then maybe it makes sense for you to follow. But for everybody earning more than Rs 15 lakh, it gets pretty simple and straightforward to go for the new tax regime because it simplifies things. It's a government way of simplifying things that there is no deduction and no exemption and you have a higher threshold and lower tax rate. But once you cross that threshold, for most people, anyway, they will have to fall into the new tax regime. So, you will have to figure out what suits you best; how are your finances configured? Do you have some possible exemptions in the old tax regime that can lower your taxes and reduce your tax outflow?

But my sense is that once you cross the threshold of Rs 15 lakh, you must go for the new tax regime because that is convenient. And that is where people have to reconcile with the fact that all these years, all these last 30-50 years, the starting point of all our investments, all our thought processes, and even expenditures have been that where can you save tax? Or how can you save tax? And how to compute it? That is something which we have to get out of. Worry about your taxes differently. But you can't do anything about the taxes. So pay your taxes, invest your money to maximise your return, and try and earn as much as possible.

So, considering that there is some benefit in opting for the new tax regime, is there any way one can still save some tax?

You can, but not in the usual way. You can't make your 80C investment by that - invest in a tax saving fund, deduct the investment from your income for computing taxes - you can't do that. All you can do is if you have the flexibility and if your employer is willing to provide you NPS because the NPS rule is that up to 60 per cent of your basic salary can be the contribution of your employer, which is a deductible expense for the employer. And it is not a taxable income for the employee. But it is an investment which is going in your name. So you can get that money from your employer into your NPS account and treat it as not your income at all.

So, if someone opts for the old tax regime, what are the specific benefits that one gets out of investing in tax-saving funds?

One is very straightforward - everybody should invest as much as possible to save taxes because tax saved is money earned. Second, why tax saving funds? Because this is the only all-equity tax-saving investment possible. Everything else is hybrid or fixed income, and fixed income will not help you beat inflation even; over the long term, it won't. So you might be very pleased with the safety of the Public Provident Fund or anything else or the five-year bank deposit. But it will not make you rich. This is the only thing which can potentially make you rich. Third, it's a very nice gateway investment for any Indian investor who has never experienced equity because what happens typically is that when you invest in equity, and even if you do your SIP and somebody has told you that markets go up and down, people are not much upset if it is steadily going up. But they are very disappointed if it starts going down soon after you start investing, and they want to run away forever because that is something nobody reconciles. We make our investment to actually grow it; we don't make our investments to see it nosedive soon after investment. So that is a very scary experience to begin with. Most people are getting attracted to an investment simply to save taxes or to opportune market; that is a very wrong starting point. What happens with this tax saving fund is that they come with a three-year lock-in, you invest, and you get locked. And once you get locked, you can get upset or feel happy, but you can't get away. And once you don't get away, you are bound for three years; it ends up being a happy story anyway. I haven't come across any tax-saving fund investor who has been disappointed that he invested his money and lost it, and that is not because of the tax-saving fund; that is because of the three-year lock-in period.

So, that is a great thing, as well as the magic of compounding that happens over a period. So, I would urge people, if you are in the habit of investing Rs 1.5 lakh every year, to carry on with that habit. I was just looking at one fund - if somebody had invested Rs 12,500 every month for the last 24 years since this fund has been in existence, which means an investment of Rs 36 lakh, this would be worth Rs 4.65 crore. It is the magic of compounding at a much higher rate and, with it, enforces discipline. So, if you have no other avenue and you earn Rs 5-7 lakh a year, and if you somehow can invest money in the tax saving fund which gets stuck for a long period of time, this will be a bonanza for you. Given that you are disciplined enough not to touch it.

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