The new tax regime has made several changes to how savings and investments are taxed. While interest income from some schemes remains tax-free, investments in those schemes are no longer eligible for tax deductions. A recent report by SBI Research explains the reasons behind this shift.
Interest Income vs. Investment Deductions
Under the new tax regime, interest earned from schemes like Sukanya Samriddhi Yojana (SSY) and Public Provident Fund (PPF) is still tax-free. However, investments made in these schemes do not qualify for tax deductions under Section 80C.
On the other hand, if taxpayers choose the old tax regime, they can claim a deduction of up to ₹1.5 lakh per year for investments in these schemes.
Why Has the New Tax Regime Taken This Approach?
According to the SBI Research report, tax incentives in the old regime did not always encourage real savings at the national level. Instead, they often led to taxpayers choosing investments mainly to save taxes, rather than focusing on long-term financial planning.
The report argues that different types of financial instruments should be taxed differently based on their maturity period.
- Short- and medium-term investments are often used for quick tax benefits.
- Long-term investments, like Sukanya Samriddhi Yojana, promote financial security and future planning, such as retirement savings or children’s education.
For this reason, the government decided to continue offering tax-free interest on these schemes but remove investment deductions under the new tax regime.
Making the New Tax Regime the Default Option
The report also highlights the government’s effort to simplify the tax process by making the new tax regime the default option. The idea is to reduce exemptions and deductions, making it easier for taxpayers to understand and file their taxes.
There are three major types of tax benefits in the Indian system:
- Deductions – Reduce taxable income (like Section 80C investments).
- Exemptions – Certain income sources are not taxed (like PPF interest).
- Tax Rebates – Reduce the final tax payable.
The report states that tax incentives with short lock-in periods were mainly used to reduce taxable income, while long-term tax benefits helped in future financial security.
Budget 2025: More Benefits Under the New Tax Regime
In the Budget 2025, the government made further changes to attract more taxpayers to the new tax regime. The exemption limit has been raised from ₹7 lakh to ₹12 lakh, making it more beneficial for middle-income taxpayers.
SBI Research believes that shifting to the new tax regime will be a smart move for many taxpayers. The simplicity of the new structure and the increase in disposable income are expected to boost overall economic growth.
“We believe the new tax regime will be more attractive for taxpayers. It will simplify the tax process and increase spending power, which will have a positive impact on the economy,” the report states.
With these changes, the government aims to strike a balance between tax benefits, financial security, and economic growth, while making tax filing easier for individuals.
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