Should You Reconsider Your PPF, SSY, and NPS Investments in New Tax Regime?

The Indian tax landscape has undergone significant changes with the introduction of the new tax regime. Designed to simplify the tax structu...

The Indian tax landscape has undergone significant changes with the introduction of the new tax regime. Designed to simplify the tax structure, this regime offers a revised set of income tax slabs compared to the traditional, old tax regime. For the financial year 2025-26, the new regime features tax rates starting at NIL for income up to Rs. 4 lakh and progressively increasing to 30% for income exceeding Rs. 24 lakh. This contrasts with the old regime, which has its own set of slabs, beginning with 0% for income up to Rs. 2.5 lakh and also reaching the 30% mark for higher income brackets.

Initially introduced in the Union Budget 2020, the new tax regime has now become the default option for taxpayers. Individuals who prefer to continue with the old tax regime, with its array of deductions and exemptions, must explicitly choose to opt out of the new system. The primary appeal of the new regime lies in its potentially lower tax rates across various income levels and a more straightforward tax filing process. However, this simplicity comes at a cost, as most of the exemptions and deductions that were available under the old tax regime are not permitted under the new one.

This fundamental shift in the tax framework raises a critical question for taxpayers who have opted for the new regime: Should they continue investing in popular schemes like the Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), and the National Pension System (NPS)? These investment avenues were often favored under the old rules, largely due to the significant tax benefits they offered, particularly the deductions available under Section 80C and Section 80CCD. Understanding the implications of the new tax regime on these investments is crucial for making informed financial decisions.

Understanding Your Existing Investments (Under the Old Rules)

Before delving into the impact of the new tax regime, it's essential to recall the features and tax advantages that PPF, SSY, and NPS offered under the old tax rules.

Public Provident Fund (PPF): The PPF is a long-term savings instrument backed by the government, with a current maturity period of 15 years that can be further extended.Renowned for its safety, it provides guaranteed returns, with the prevailing interest rate standing at 7.1% per annum, compounded annually, for the financial year 2025-26. Under the old tax regime, the PPF enjoyed an EEE (Exempt-Exempt-Exempt) status. This meant that contributions to the PPF were eligible for tax deduction under Section 80C of the Income Tax Act, up to a maximum of Rs 1.5 lakh each financial year. Furthermore, the interest earned on the PPF account was entirely tax-free, and the amount received upon maturity was also exempt from tax.

Sukanya Samriddhi Yojana (SSY): The SSY is another government-supported savings scheme, specifically designed to benefit the girl child by helping to accumulate funds for her higher education and marriage. An account can be opened from the time of the girl child's birth until she reaches the age of 10, and the scheme matures 21 years after the account opening date. The SSY offers a more attractive interest rate compared to the PPF; for the first quarter of FY 2025-26, the rate is 8.2% per annum, compounded annually. Similar to the PPF, investments in the SSY also enjoyed the EEE tax status under the old regime. Contributions to an SSY account were eligible for deduction under Section 80C, with a limit of Rs 1.5 lakh per year , and the interest earned along with the maturity proceeds were also entirely tax-free.

National Pension System (NPS): The NPS is a retirement savings scheme that offers returns linked to the market and aims to provide a regular income after retirement.12 Under the old tax regime, the NPS provided tax benefits under Section 80CCD.56 This included a deduction for self-contributions up to 10% of salary (within the overall limit of Rs 1.5 lakh under Section 80CCE) under Section 80CCD(1) , an additional deduction of up to Rs 50,000 for contributions beyond this limit under Section 80CCD(1B) , and a deduction for employer contributions up to 10% of salary (14% for Central Government employees) under Section 80CCD(2), which was over and above the Section 80CCE limit. Furthermore, partial withdrawals and the lump sum withdrawal at maturity also enjoyed specific tax exemptions.

The Shift in Tax Landscape: Impact of the New Regime

The introduction of the new tax regime has fundamentally altered the tax treatment of investments. A key feature of this regime is the removal of a significant number of exemptions and deductions that were previously available under the old tax rules. This includes the widely utilized deductions under Section 80C, which covered investments in both PPF and SSY.

Consequently, if an individual chooses to file their taxes under the new regime, contributions made towards PPF and SSY are generally no longer eligible for tax deduction.12 This marks a significant change for investors who had previously relied on these deductions to lower their taxable income under the old regime.

The impact on the National Pension System (NPS) is somewhat different. Under the new tax regime, the deductions for self-contributions under Section 80CCD(1) and the additional deduction under Section 80CCD(1B) are typically not available. However, the deduction for the employer's contribution to NPS under Section 80CCD(2) remains, and its limit has even been increased to 14% of salary (basic + dearness allowance) for both government and private sector employees, effective from FY 2025-26.

PPF in the New Tax Era: Should You Stay Invested?

Under the new tax regime, the primary tax benefit of the PPF for many investors, the Section 80C deduction on contributions, is no longer applicable. However, it is crucial to recognize that the interest earned on the PPF, which currently stands at 7.1%, and the maturity amount continue to be entirely tax-free under both the old and new tax regimes. This effectively gives PPF an Exempt-Exempt (EE) tax status under the new regime, which is notably different from the Exempt-Tax-Tax (ETT) status of Fixed Deposits (FDs), where the interest earned is taxable according to the individual's income tax slab.

The PPF remains a secure, government-backed, and long-term investment option, particularly well-suited for retirement planning due to its 15-year lock-in period, which fosters financial discipline. Even without the initial tax deduction on contributions, the completely tax-free returns at maturity make it a valuable instrument for long-term wealth accumulation, especially for individuals with a lower tolerance for risk.

Sukanya Samriddhi Yojana: Does It Still Make Sense?

Similar to the PPF, the new tax regime implies that contributions to the SSY are no longer eligible for deduction under Section 80C. However, the interest earned, which is currently a high 8.2%, and the maturity amount continue to be tax-free (EEE transforms into EE).

The SSY is specifically tailored for the long-term financial security of the girl child, primarily for her higher education and marriage expenses.25 The significantly higher interest rate it offers compared to the PPF makes it a very attractive investment for parents, even in the absence of the Section 80C benefit. When compared to other investment options for children, such as children's mutual funds, the SSY provides guaranteed returns backed by the government, although it does come with a longer lock-in period.

National Pension System (NPS): A Retirement Plan Under the New Rules

Under the new tax regime, the direct tax benefits for self-contributions to the NPS under Sections 80CCD(1) and 80CCD(1B) are generally not available. However, a notable advantage remains for salaried individuals: the deduction for the employer's contribution to the NPS under Section 80CCD(2) has been increased to 14% of salary (basic + dearness allowance) for both government and private sector employees, effective from FY 2025-26.1 This continues to make the NPS an appealing retirement planning tool, especially for those in the salaried class.

The NPS offers market-linked returns, which have the potential to be higher than traditional fixed-income instruments over the long term. It also provides benefits such as portability across different jobs and locations, and relatively low fund management charges. When compared to other retirement savings avenues like mutual funds, the NPS offers a more structured framework with specific guidelines for withdrawals and annuitization.

Beyond Tax Benefits: Focusing on Long-Term Financial Goals

While the tax advantages under the old regime served as a significant incentive for investing in PPF, SSY, and NPS, it is important to remember that the fundamental purpose of these schemes is to assist individuals in achieving their long-term financial aspirations.

The PPF continues to be an excellent instrument for building a secure, long-term financial base, particularly for retirement, offering guaranteed returns and tax-free maturity proceeds.

The SSY remains the optimal choice for securing the financial future of a girl child, providing a high, guaranteed interest rate and tax-free returns specifically earmarked for her education and marriage.

The NPS continues to be a vital tool for retirement planning, offering the potential for higher returns through market exposure, alongside the continued tax benefit on employer contributions under the new regime.

The power of compounding in these long-term schemes can significantly contribute to wealth accumulation over time, making continued investment a sound financial strategy.

Making the Right Choice: Factors to Consider

When deciding whether to continue investing in PPF, SSY, and NPS under the new tax regime, several factors should be taken into account:

• Individual Income and Tax Bracket: Assess your income level and the applicable tax rate under the new regime. If the lower tax rates result in significant savings, the absence of the deduction might be less impactful.

• Reliance on Old Regime Deductions: Evaluate how much you benefited from deductions under the old regime. If your total deductions were not very high, the new regime might be more advantageous overall, and continuing these investments for their inherent benefits could still be a good strategy.

• Long-Term Financial Goals: Your primary financial objectives are crucial. If you are specifically saving for retirement (NPS, PPF) or for your daughter's future (SSY), the ongoing benefits and the purpose of these schemes should be a major consideration.

• Risk Appetite: Your comfort level with risk is important, especially when considering the NPS with its market-linked returns compared to the guaranteed returns offered by PPF and SSY.

• Employer Contribution to NPS: For the NPS, the availability of employer contribution is a key aspect under the new regime. If your employer contributes to your NPS account, the tax benefits can still be substantial due to the increased limit.

• Liquidity Needs: Consider if you might need access to these funds in the short to medium term. PPF and SSY have lock-in periods, which might be a factor if you anticipate needing the money before maturity. The NPS also has restrictions on withdrawals before retirement.

Conclusion: Navigating Your Investment Strategy in the New Tax Regime

The decision regarding whether to discontinue investments in PPF, SSY, and NPS after opting for the new tax regime is a personal one and depends on individual circumstances. While the upfront tax deductions on contributions are largely no longer available, these schemes continue to provide valuable benefits such as tax-free returns (for PPF and SSY), the potential for higher returns (NPS), and a disciplined approach to long-term savings for important life goals.

It is advisable to carefully consider your personal financial situation, long-term objectives, and risk tolerance. Continuing these investments might still be beneficial, particularly if the tax-free returns or the specific purpose of the scheme aligns with your overall financial plan. If you are uncertain about the best course of action, seeking advice from a qualified financial advisor can provide personalized guidance to help you analyze your situation and make well-informed decisions.