How to choose the best tax saving plan under the old tax regime

A significant chunk of India’s revenues comes from taxes, be it individual or corporate. During the tax season, all taxpayers look for different ways to save and avoid taxes. The Government of India introduced a new tax regime in 2020 for the Financial Year 2020-2021.

From the new Financial Year 2020-2021, taxpayers can choose from the old or new tax regimes. There were a lot of significant changes in the new regime like almost zero deductions and lower tax rates. Mentioned below is the comparison of the old regime vs the new regime of taxes.

Old Tax Regime vs New Tax Regime

As mentioned above, the new tax regime offers lower interest rates but no deductions or exemptions. It also offers more tax slabs. The old tax regime allows deductions or exemptions based on certain investments like ELSS (Equity Linked Saving Scheme), PPF( Public Provident Fund), NPF(National Pension Scheme) etc., under section 80C, which is quite a famous Income Tax Act.

There were 70 tax exemptions in the old scheme, which are no longer a part of the new tax regime.

The New Tax Regime has periods of lock-in for investments under section 80C. These include three-year lock-in periods for ELSS investments. It also includes withdrawing one’s Employee Provident Fund or EPF, Voluntary Provident Fund or VPF after retirement.

Keep in mind that this choice is only for salaried individuals or HUF. Those earning an income from their business cannot make a choice.

Individuals who have income from business cannot always make this choice. They have only one chance to switch and go back to the old regime.

Benefits of the Old Regime

While choosing the new regime, you let go of certain exemptions that the old taxation regime came with. Here are a few examples:

Children’s education or marriage: The old tax regime offered deductions on children’s tuition fees and other investments for the same purpose. It also offered deductions on the interest on loans taken for a similar matter.

Life Insurance: Almost all individuals these days have life insurance. Under the old regime, the premium on life insurance could be claimed for deduction.

Medical Insurance: Under section 80D, up to Rs. 25000 premium paid for self or family is tax-free. This acts as a motivation factor, too, for people to buy insurance because they will have some exemptions from the Income Tax department.

Home Loan Interest: Interest paid on a home loan is eligible for a tax deduction. Under the old tax regime, even the principal amount was eligible for tax deductions.

Financial investments: Under section 80C of the Income Tax Act, certain financial investments are eligible for a tax deduction.

How to choose the best tax saving plan under the old tax regime?

While deciding which one is the best tax saving scheme to choose, one must be clear about the investment objectives. The decision must be made after a thorough weightage of pros and cons. This is because often, when people decide what the best tax saving plan to buy is, they make a mistake by selecting the plans which allow a lot of deductions but do not yield enough returns or do not fit in the requirements of the individual’s saving or investing objectives. Hence one must be very clear and careful while choosing the best tax-saving plan under the old tax regime.

Following are a few of the best tax saving schemes under the old regime: 

ELSS: Equity Linked Saving Schemes or ELSS funds are said to generate high returns. However, these risks need to be perceived as calculated risks and should be taken only per a person’s risk appetite. ELSS funds require a lock-in period of 3 years only.

You can use the S.I.P. or Systematic Investment Planning option to get the most satisfactory results instead of the lump sum. It is also highly advisable to invest for the long term instead of a short period for two reasons: this generates or yields better returns, and the risk is less.

PPF: Public Provident Fund or PPF offers tax-free fixed guaranteed returns. That is not the only reason why this product is so famous. PPF is considered to be one of the safest investment options. It is highly recommended as an investment option if your goal is retirement, children’s education, or marriage.

NPS: National Pension Scheme or NPS helps you generate a pension during your golden years. With its tax deductions under section 80 CCD, NPS comes highly recommended.

ULIP: Unit Linked Insurance Plans, or ULIP, are a favourite among salaried individuals as a tax-saving investment option. They are sold by life insurance companies and come under section 80C and tax-free benefits under section 10(10d). ULIP has a minimum lock-in period of 5 years, and withdrawal before maturity attracts charges. The plus point of ULIP is that it offers death benefits and professional fund management.

Life Insurance: They offer the lowest returns compared to other products under the 80C umbrella. Risk in these plans is also the lowest, not to mention the benefits of the life insurance policy.

Conclusion

As experts suggest, you have various categories to factorise before deciding to go with the new or old tax regime. You will benefit more from the old tax regime if your income increases. The old tax regime gave investors a sense of freedom with various options eligible for deductions and exemptions.

The new tax regime is mainly made for Gen Z or for those whose careers have just taken off. Income tax calculators are available online that help you compare which is beneficial for you. With the help of consultation, you can derive many benefits from the old tax regime.

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