3 Investment Ideas To Consider Under The New Tax Regime

In her Union Budget presentation, finance minister Nirmala Sitharaman introduced a new and optional tax regime that will allow individuals to choose bigger tax rate cuts if they let go of certain deductions and exemptions.

The upcoming financial year 2020-21 is less than two months away, giving you an ample amount of time to make your choice of tax regime.

You can also switch between the new and the old tax regimes, as per your needs.

If you are young, do not have dependents or financial commitments (loans), long term investments like life insurance covers or retirement planning may not be on your mind and under the new tax regime, you can look at investments that outweigh their tax-saving benefits.

1. Equity

Direct equity investment in India is now easy, thanks to technological advancement and easy access to fast internet.

If you are in it for long-term (one year or more), you can enjoy tax-free income on gains of up to Rs 1 lakh. This is ideal for small investors who have just started earning and have the time to do their own research.

There are, however, two things to be mindful of-

• financial discipline: While equity can be bought through brokers, it becomes the responsibility of the individuals to maintain their portfolios and take a call on when to buy or sell shares. It is important to be quick in deciding when to enter or exit an investment and when to not be greedy.
• charges: There are brokerage fees, stamp duty, etc imposed on transactions, which could be negligible if you make decent profits.

2. Growth mutual funds

Investments in ELSS (Equity Linked Savings Scheme) may appear to have lost their charm, however, if you do have one, it would be wise to continue with your SIP and not change your financial goal for the new tax regime.

Instead, you can switch to growth option from dividend.

Due to applicability of tax on dividends-earned on the receiver's end, investors are confused over the tax implications on dividend income.

Growth option in equity-oriented mutual funds allows the fund house to reinvest the money that would be otherwise paid to you in the form of dividend and increases the net asset value (NAV) of the mutual fund. This option is available if you are not in need of a monthly income from this investment.

The advantage is that while dividend earned above Rs 5,000 in a year is taxable, your gains from selling the mutual fund (in growth option) after a year will not be taxable up to Rs 1 lakh, limiting tax burden.

3. Debt funds

Equity markets are known for their high volatility. Investors are not always rewarded for their patience.

With deductions under section 80C, guaranteed income options like endowment policies, PPF and other small savings schemes are wise choices to diversify one's investment portfolio in order to curb the negative impact of equity investment.

However, under the new tax regime, you could look at debt funds, which are also immune to market volatility and come with fixed maturity period and rate of interest. This also makes it a good choice to protect your money against uncertainties like an economic slowdown.

You can alternatively invest in debt ETFs as the government continues to make efforts to increase retail participation in debt markets, especially government securities.

The mutual fund or ETF may be investing in a government or corporate bond.

While LTCG from debt funds are taxable at 20 percent (after indexation), short term gains are added to your overall income to be taxed as per your income slab, helping you take advantage of the reduced tax rates under the new tax regime.

Also Read: New Income Tax Regime vs Old: Which Will Help You Save More?

Things to note before making investment decisions

• Tax savings should not be your primary objective to make an investment. Save and invest money based on your financial goals and risk-bearing capacity.
• Equity and mutual funds are subject to market risks and may not always guarantee high returns.
• Read all the documents you sign with the brokerage or asset management company to check if they are in line with your objectives and does not include hidden charges.
• Check the exit load as well as expense ratios before you invest as these charges will affect your returns if you choose to sell the mutual fund units, making tax-saving efforts fruitless.
• Choosing between existing or new tax regime is completely individual-centric and depends on your loan obligations, investment commitments and salary structure.

Disclaimer
The article is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.

About the author
Olga Robert has been covering equity markets and personal finance for over two years.