Before making tax-saving investments, learn about the new taxation rules. Which ULIPs, EPF, ELSS, equity, and debt funds offer tax-free returns, and where will you have to pay taxes?
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Tax Saving Investment Planning: When it comes to tax-saving investments, investors often think of popular options like Employees’ Provident Fund (EPF), Unit-Linked Insurance Plan (ULIP), and Equity-Linked Savings Scheme (ELSS). However, the tax rules related to these products have undergone several changes over the past few years. The introduction of the new tax regime has also changed the meaning and importance of tax-saving investments. Therefore, it is important to understand the new taxation rules related to different investment options before making investment decisions.
Current Taxation Rules for ULIPs
For a long time, ULIPs were considered the most tax-efficient product. Premiums were tax-deductible under Section 80C, and the maturity proceeds were completely tax-free. However, the rules changed for policies issued after February 1, 2021. Now, if the combined annual premiums from all ULIPs exceed Rs 2.5 lakh, the maturity proceeds will no longer be tax-free. The only relief is that the death benefit is still completely tax-free, regardless of the premium amount.
Investors opting for the old tax regime are eligible for the 80C exemption on premiums, but if the policy is discontinued before five years, the previously availed tax exemption becomes taxable again. This exemption is not applicable in the new regime.
Impact of New Rules and the New Tax Regime on EPF
Employment savings in EPF is considered the safest and most reliable part of retirement planning. The most important rule is that if money is withdrawn after five years of continuous service, the entire amount is tax-free. However, if withdrawals occur before five years, the amount is taxable according to the tax slab.
Another change was made in 2021. If an employee’s personal contribution exceeds ₹2.5 lakh per year, the interest earned on the excess amount becomes taxable. This is intended to prevent EPF from becoming a tax-saving tool for high-income earners.
The most significant change since the implementation of the new tax regime is that employees’ EPF contributions are no longer eligible for the 80C exemption. However, employer contributions to EPF remain tax-free up to a certain limit, and withdrawals after five years are also tax-free. For this reason, EPF still remains a good option for long-term retirement planning, even though the tax exemption has reduced slightly.
ELSS and Equity Mutual Funds
Mutual funds that invest more than 65% of their capital in equities are called equity mutual funds. Gains up to ₹1.25 lakh per financial year are tax-free if held for more than one year, while gains beyond that are subject to a 12.5% long-term capital gains tax. Selling within less than one year attracts a 20% tax.
ELSS funds also fall under the equity fund category, but have a 3-year lock-in period, and investments up to ₹1.5 lakh per year are tax-exempt under Section 80C. Gains from ELSS funds are subject to the same tax rules as other equity mutual funds.
The picture has completely changed for debt mutual funds. Gains on debt fund units purchased after April 1, 2023, are now directly taxable according to the income tax slab, regardless of the holding period.
Exercise caution before investing
Overall, it’s crucial to be up-to-date with the latest regulations when planning your investments for the new financial year. Understanding the current tax rules for each investment product and building your portfolio accordingly will reduce your tax burden. In most cases, investing in equity-based products for the long term can offer significant tax benefits. However, equity investments involve market risk, so be sure to consider your risk tolerance before investing.
(Disclaimer: This article is intended for informational purposes only, not investment advice. Make any investment decisions only after obtaining complete information and consulting a SEBI-registered investment advisor.)
