From this financial year, all the younger folks in my small team decided to go for the new tax regime. Their choice made perfect sense. With the higher tax exemption and better tax slabs under the new tax regime, younger investors get the freedom to choose where they wish to invest in. More importantly, they don’t need to lock their money in products or options that may be sub-optimal.
If you are one of those parents advising your daughter/son with a first job to open a PPF, buy a money-back insurance policy, and then invest in a flat – all for tax saving – I am afraid your advice will not hold water any more (not that rest of your advice is heeded anyway!).
I am sure many of you are not with me in this line of thought! You may argue that tax incentive is a major consideration for savings in India. Hence, a new tax regime, without such incentives, might turn a nation of young people into spenders than savers, you might worry. That might simply remain a worry. And hear why!
When I started with a job over two decades ago, most of our investment decisions were determined by tax breaks. It could have been a poor returning guaranteed income policy or buying a first or second house merely to get the interest on home loan deduction. For the wiser ones, a chunk of your savings may have gone into good products such as PPF, but then leaving very little to deploy in the capital markets and earn more returns in the long term.
For the most part (other than PPF), these were sold to you by manufacturers or those who earned hefty commissions from such manufacturers, and you were made to believe that no product without tax incentive is a good product.
Many poor-returning products with 4-5 per cent returns or less were sold on their strength of having tax breaks. Many unsuitable and risky products were sold to seniors for tax breaks.
I think moving towards an exemption-less regime or the New Tax Regime would help your children break-free from the shackles of such product manufacturers and distributors. It will also force manufacturers to focus on performance than sell under the guise of tax breaks.
I think the younger generation can also be spared from the unnecessary home loan EMI burden that was imposed on many of you, to save tax outflows, despite poor rental yields as low as even 2 per cent!
So, if you are wondering where your children will invest in a no-tax incentive regime, don’t worry, there are a plethora of options.
Where to begin?
If your son or daughter is employed, then the Provident Fund available in their company should suffice for the safe and secure investment option. PPF is not a must. Options in post office small savings such as recurring deposits or time deposits should also be good.
Over the years, PPF rate has only steadily been falling and cannot be expected to touch the 9 per cent plus levels that you were enjoying long ago. In fact, the post office time deposit currently offers 7.5 per cent for a 5-year deposit — higher than PPF (which is also subject to change every year).
Do remember that even this is not a must. If your child prefers an online deposit in their bank account, many new-age banks offer good deposit rates now. A deposit up to ₹5 lakh, given the insurance cover, is safe to invest in, for attractive rates.
Once this is done, the next thing is to look for options that can deliver well over the long term for wealth building. No, there is no need to approach a distributor or introduce your daughter to your bank relationship manager to start this.
They can start with simple index mutual funds and ETFs and do an SIP regularly for the long term. Your child will likely know where to do this online. If not, ask them to talk their friends or Google to find out.
A simple index fund using indices like the Nifty 50 is all it takes to get exposed to the capital market. This is a far better way to start investing than burdening your children with tens and thousands of EMIs at an young age.
Of course, by all means, encourage your daughter/son to have a term cover (especially if you are a dependent or they have dependents) and good health insurance cover — even without the tax benefit. These cost less when they are young and carry immense benefit.
Nothing more is really needed for beginners. And if they have some free cash without the Section 80C savings, let the adults enjoy it in their own terms, it’s not your regime anymore!
(The author is co-founder, PrimeInvestor.in)