Earlier this month, I watched a video of Idina Menzel take the stage at the Oscars to sing “Into the Unknown” — the song from Frozen 2.
Little over a week before the Oscars, when the Finance Minister announced two tax regimes, one with tax exemptions and the other without, there were many questions asked on what would happen now. ‘Everything seems uncertain!’ My response: yes, you will be stepping into lesser known territory, but it might throw newer and better opportunities.
This article is not in defence of or against the Budget proposals. It is more to embrace changes and look for newer opportunities, by stepping into the unknown. I am just taking recent Budget proposals to enumerate my thoughts.
Over the past few years, changes through the Budget and outside of it have been in the following direction: one, the country is set to give you more tax-efficient routes to investing. Whether it is more equity / bond ETFs / sovereign gold bonds, or NPS or InvITs, or REITs, the nation is set to have more regulated, efficient investing in financial instruments across asset classes.
Two, the government has also been signalling that you need to save in your own interest and not merely to get the carrots (read tax benefits). For example, by reducing the high interest deduction and claiming set-off on loss on house property a few years ago, the government signalled that you cannot use tax benefit to invest in any number of properties.
The message overall appears to be: the government will provide you with more regulated, efficient options to invest. You may move to those for your own benefit and not for tax benefit alone.
These options will be tax-efficient, not tax-free. By being tax- efficient, I mean, those that are taxed low (either due to indexation or lower rates) at the time of your exiting.
Yes, at present, you have the option of continuing with the old tax regime and claiming all deductions and exemptions, with status quo being maintained.
But what if tomorrow, this is slowly phased out? Importantly, what should the younger generation coming into the workforce adopt?
Embrace it now
What are the things you can do to ensure your investment path is not troubled by extraneous factors such as tax changes? First, know that not all your investments will turn unattractive when you lose benefits. You must weigh them relatively for their returns.
Will PPF and EPF still provide you with better net returns than a bank FD?
If they do, you may not need to stop investing in them. Similarly, when it comes to covering your life or your medical expenses, tax breaks or not, they are a must.
If you had been paying high- premium, low-yielding money back policies in the name of investment, then this may be a good time for you to do a spot of spring cleaning of your investment portfolio.
Get a financial planner (for a fee) to do this one-time work and eliminate poor products in your basket.
Second, know that the only way to make up for lost tax benefits is to invest in cost-efficient, tax-efficient options that will generate superior long-term returns.
That means you have little choice but to start exploring options such as mutual funds, ETFs and bonds to ensure you make up in the long term.
If you are a starter in these products, the best thing would be for you to not make the same mistakes you made with some insurance products. That is, you don’t buy products because your relationship manager or agent told you.
Understanding benefits
You buy them if you understand their benefit and understand the risks. Bottomline, you will need to do more homework. Earlier, you could take shelter for buying a poor product because it at least gave you tax benefits. You can’t do that under the new regime where no such benefits will be available.
Third, if you are making any major decisions (be it an insurance policy or investing in more properties or upping your NPS) in the future, do not be entirely led by tax benefits that are promised.
They may not be available tomorrow. In other words, the overriding factor influencing your investment decision must be the benefit of the investment itself and not the tax break. Also, do not tell your children (stepping into careers) to do the usual tax-saving options that you did. You can’t be sure what will fit them. Let them start investing in contemporary products, not just driven by taxes.
Lastly, if you have always made decisions based on taxes and invested in products with no uncertainty, think again.
Uncertainty is not new
The gold investments you may have made had little certainty or tax benefit about it. The land or property you bought did not promise you with any fixed returns.
You didn’t even realise you made money out of them. And yet, you embraced the uncertainty of those. Now, it may be time to embrace the uncertainty of good, regulated products that simply need you to be patient and disciplined.
In other words, it is better that you step into the unknown now before you are forced to, later.
(The author is co-founder, Primeinvestor.in)
