Budget 2024’s Potential Impacts On Small Saving Schemes: What Should Investors Do?

Ahead of the upcoming Budget 2024-25, investors are keenly looking out for potential changes and reforms that could impact their key small-saving investment instruments such as the Public Provident Fund (PPF), Employees' Provident Fund (EPF), and National Pension System (NPS). Experts say that there is a lot of hope for changes in such small savings schemes. Union Finance Minister Nirmala Sitharaman is set to present the Union Budget for 2024-25 in the Lok Sabha on July 23. 

Public Provident Fund (PPF)

The PPF is a long-standing favourite among risk-averse investors. It offers a stable interest rate of 7.1 per cent per annum and also offers tax benefits. Currently, PPF allows a minimum investment of Rs 500 and a maximum of Rs 1.5 lakh for each financial year. Here, investments can be made in a lump sum or a maximum of 12 instalments. 

Interest Rate Adjustments: Ahead of Budget 2024, Gaurav Bhagat, Managing Director of Consortium Gifts hopes that the government will slightly increase the interest rates to keep up with inflation and make saving more attractive. 

Investment Limits: Many investors hope to allocate more of their savings into this tax-free, secure instrument. “The investment limit under Section 80C, which has been Rs 1.5 lakhs for many years, should be raised to Rs 2 lakhs to encourage more savings,” Bhagat suggests.

However, Soumya Sarkar, Co-founder of Wealth Redefine (AMFI registered MFD) says there may not be any major reforms or changes in the PPF. “The focus might remain on maintaining the current interest rates and investment limits,” he opines.

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Employees Provident Fund (EPF)

EPF, a crucial saving/investment instrument for salaried employees, currently offers an interest rate of 8.15 per cent per annum. Contributions over Rs 2.5 lakh per annum are taxable, which affects high-income earners.

Interest Rate Stability or a Possible Hike? “Keeping or slightly raising the current 8.15 per cent interest rate is important to maintain trust among salaried employees. Increasing the tax deduction limit under Section 80C would also provide more tax relief and motivate people to save more in their EPF accounts,” Bhagat says.

Taxation Revisions: “EPF/ PPF contributions are a common and popular investment destination for individuals, the expectation is to get the same covered in the New tax regime to make the regime more popular,” says Akhil Chandna, Partner, Grant Thornton Bharat.

Investors also anticipate revisions in the tax threshold for EPF contributions. Raising the tax-free contribution limit from Rs 2.5 lakh to Rs 3 lakh could provide some relief to higher-income employees and encourage savings.

National Pension System (NPS)

A popular, voluntary, and long-term investment plan for retirement under the purview of the Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government, NPS offers a mix of equity and debt exposure. It comes with tax benefits under Section 80C and an additional Rs 50,000 under Section 80CCD(1B) along with an overall limit of Rs.1.5 lakh under Section 80CCE. Government employees benefit from higher contributions.

“The extra tax rebate limit under Section 80CCD(1B) should go up from Rs 50,000 to Rs 1 lakh to help individuals save more for retirement. Moreover, improving the fixed-income options within NPS can also ensure stable and higher returns,” says Bhagat.

“Despite this potential tweak, substantial changes are not anticipated,” Sarkar remarks.

Taxpayers who contribute up to Rs 50,000 in their NPS (Tier I) account can claim the same as an additional deduction. “This benefit can be claimed by salaried as well as non-salaried individuals under the old tax regime. Extending the benefit to the new tax regime would benefit both salaried and non-salaried individuals,” Chandna suggests.

How do the Budget expectations for these instruments compare to past years? 

“After the introduction of the new tax regime, the focus of the Government has been to reduce deductions/ exemptions and make tax rates lucrative,” Chandna notes highlighting how no major announcements have been made so far in the old tax regime. 

“As tax benefits on contributions to PPF and EPS get covered under the old tax regime only, it is expected that some of these benefits under the old tax regime should get covered under the new tax regime to encourage savings by taxpayers in these schemes,” he further comments.

Sarkar on the other hand is of the view that compared to past years, the expectations for PPF, EPF, and NPS in the upcoming Budget 2024-25 seem to be relatively stable. “Historically, major shifts in these schemes have been infrequent, with incremental changes being more common. This year, the focus appears to be more on potential tweaks in tax benefits rather than substantial overhauls,” he says.

Are there any notable trends or shifts in focus?

“One notable trend is the increasing attention to equity and mutual funds,” says Sarkar emphasising that there has been growing advocacy for tax incentives for mutual funds to boost the equity culture in the country. “This focus might overshadow significant changes to traditional small savings schemes like PPF, EPF, and NPS,” he opines.

Bhagat, on the other hand, remarks that the bull market has shifted focus from traditional savings to mutual funds, “with a 15 per cent increase in SIP accounts in 2023”. “Meanwhile, NPS participation grew by 20 per cent, reflecting a shift towards robust retirement planning,” he says.

What Should Investors Do?

Small-savings instruments are less about your current needs and more about your retirement planning to build a suitable corpus.

“In India, small saving schemes are very good considering the safety of investment and better investment returns. Tax is just an element of the overall scheme. Even if tax-adjusted rates are compared, the interest rates beat fixed deposit interest rates. Accordingly, individual investors should continue with their investments in small saving schemes such as EPF, PPF, NPS, etc., to generate a good corpus for retirement,” Chandna suggests.

Reiterating his view, Sarkar says that any significant changes are unlikely, so maintaining current investment levels and focusing on the steady growth provided by these schemes remains a prudent approach. However, “investors should keep an eye on potential increases in the tax deduction limits for NPS,” he says.

In any case, maintaining a balanced mix of investments and sticking to your financial plan is the best approach. “Focus on your long-term goals, regardless of what changes the budget may bring, to ensure financial stability,” Bhagat says.