How will a shift to the new tax regime impact investments on ground?

How is the shift towards the new tax regime going to impact investments on ground?
80C and 80D are the two provisions we think of while talking of tax saving while investing. Tax planning is a much bigger thing. Investing in your children’s name and making sure that they withdraw after they are 18 or making sure that you invest in mutual funds instead of investing in fixed deposits so that you can turn that income into capital gain instead of current income. These are the parts of tax planning. Those things remain, nothing changes there.

Within 80C and 80D, 80C had become irrelevant for most people because 80C included school fees, home loan repayment, provident fund contributions. That one-and-a-half lakh had anyway become a joke. Will you stop taking medical insurance because the tax deduction is no longer available? No, that also does not sense.

So I do not think it is going to have too much of an impact. But all that mis-selling which was happening in the name of saving tax will go down and I think that is a good thing. I mean, will you stop buying a house because the deduction is gone? Will you stop taking medical insurance because the deduction is gone? It would be very foolish to do so. So I do not think that is going to be impacted much.

There are a certain section of investors who have already started these investments like PPF. Now with a 15-year lock-in that the PPF typically has, if the new tax regime is phased out, how do they respond? How do they react to this particular development? I understand that maybe the entire driver behind claiming an 80C or rather doing a PPF is not to claim an 80C deduction but at the same time a certain component of planning has gone into it. How should one go about switching or changing their game plan?
You really cannot change much. If you bought a house with a 20-year EMI, what are you going to do? Are you going to sell that house because the 80C has gone away? Are you going to stop paying children’s school fees? Nothing is really going to change. Yes, you are putting Rs 50,000 in PPF to claim the tax benefit. You may start putting Rs 5,000 or Rs 1,000, whatever is the minimum, but you will not put the full 50,000 or 1,50,000.

So many people would say, okay one lakh is going from my provident fund and 50,000 I will put it into PPF or something like that. Now that will stop. People who are doing it just for tax benefit will not put it into PPF. But with 7.15% tax-free return, PPF by itself is a good way to invest. It is a very safe government security and with a 7% tax-free return, very few other investments will ever be able to match that.

Yes, of course, it has a 15-year lock-in, but you always knew it had a 15-year lock-in. So nothing else has changed. In fact, there is no law which says the PPF interest cannot be made taxable. As of now, it is tax-free. So I do not think we will have too much of a worry on the PPF or national savings certificate. Yes, those who took insurance policies just for the tax break will stop paying. Those who invested in ELSS (Equity Linked Saving Scheme), may just relook and say anyway the fund is not performing and I will redeem. Those kind of things will happen but I do not think it is going to have a great impact on the PPF.Which income bracket would find the old tax regime more beneficial or would stop investing because of the new tax regime coming into the picture?
I think people have a choice of switching to and fro. So this year I can go to the new tax regime, next year I can come back. But look at the government’s language. I think in three years’ time, the old tax regime would completely be phased out.

So, if you are 32, 33 and are earning about Rs 10 lakh, do not break your head too much about it. Do both the calculations, take whichever is favourable. But be ready that in a year or two, this thing will get phased out. We are moving towards more and more simplification. So, the HRA will go, other deductions will go and interest on house loan repayment will go. I do not think you should break your head it too much.

If you are going to be in the Rs 7 lakh annual income bracket, you do not even have to think; Rs 12-15 lakh, depending on how much of 80C and 80D you are claiming, 80G and you have got house rent on that you have got a 30% deduction. If you are claiming all that, the composition will have to be checked. So, every guy or girl will look at it, do the calculation and choose. But I think by 2025, 2026, the choice will also go.

If I can ask you, does this in any way make it less lucrative for an individual or an insurance salesperson to sell both life as well as medical or general insurance?
One has to be very clear about the reason behind investing. Now, everybody who is doing an SIP is not doing it for a tax break. Rs 13,500 crore per month is the amount of money that people are investing in equities through SIP, Are these people doing it for tax benefit? No.

Do you take medical insurance for tax benefit? Yes, tax benefit helps; but does it mean you will give up medical insurance? You should not. Will you give up on PPF? You should not. Maybe you will give up on ELSS, maybe you will put it into some other scheme which is good, at least you do not have any lock-in there.

You will now judge an investment just on the merit, otherwise people would say oh, so what if you are getting lesser returns, you are still getting a tax break. I think nonsense sales will go. People will invest according to the merits of the investment. People will take insurance which is needed. A 32-year-old couple who has a little kid and says the wife is pregnant needs medical insurance. They definitely need term insurance. If something were to happen to the breadwinner, what happens to them? They require it even when they are 55 and so that will continue.

But if you have taken some policy just to save taxes, those kinds of policies should not have been sold at all and will now get thrown out of the window. People will stop paying the premium. Many policies will become fully paid up. But please understand, many people do not even understand all this and they will continue to pay the premium.

So will the market vanish? The answer is no. Will the market reduce in size? Yes. Will the investments be judged just on merit and not the tax break? Answer is yes. So a good step towards simplifying and judging investments as standalone without the combined tax impact.