Why is income from Sukanya Samriddhi Yojana tax-free in the new regime but not the investment?

Ever wondered why there's no tax on interest income from certain schemes, yet investments in them are taxed under the new tax regime?

For instance, there is no tax on the interest income from schemes like Sukanya Samriddhi Yojana or the Public Provident Fund (PPF) under the new tax regime. However, investments in these schemes do not qualify for section 80C deduction if you opt for the new regime.

But if you opt for the old regime, you can claim a deduction of up to ₹1.5 lakh/year against investments in these schemes.

Old regime needed a relook

According to the report, tax incentives on various financial assets in the old regime violated the "principle of equity and efficiency without generally enhancing savings at macro level."

Therefore, the "continuation of different tax incentives on various financial assets needed a relook".

Different tax treatment

The report says that the tax treatment for financial instruments having long-term maturity should differ from that of short- and medium-term maturity as these instruments play a special role in the promotion of long-term financial accumulation by way of social security.

“Thus, for example, while individuals investing in Sukanya Samriddhi Yojana for their girl child will continue to receive tax exempted interest in the account under the new tax regime and the maturity proceeds received from the scheme's account will remain exempted from tax. However, investment under this scheme will not be available for tax-break under section 80C under the new tax regime,” says SBI Research.

“Thus, long term savings will continue to be encouraged, thereby promoting long term financial accumulation and social security,” it adds.

The report further says that the decision to make the new regime as the default tax regime is in line with the government’s aim to simplify the tax process for individuals.

Three financial instruments

Deductions, exemptions, and tax rebates are three kinds of financial instruments under the Indian tax system.

“Tax incentives with short to medium-term lock-in provisions re-channel savings on the preferred instruments for tax avoidance. In contrast, tax incentives in long-term instruments channel the savings towards long-run anticipated fall in income (retirement) and increase in consumption (children’s education, marriage), thereby increasing the financial assets and general level of savings in the economy,” says the report.

New regime sweetened

In Budget 2025, the Government has tweaked and recalibrated the tax slabs to make the new tax regime more attractive. Also, the issue that the new tax regime could be regressive has been effectively addressed now, with the exemption limit at the lower end increased significantly from ₹7 lakh to ₹12 lakh.

“We believe, the movement to a new tax regime will be a smart move by existing taxpayers in search of simplicity and more disposable income. Also, the overall impact of consumption multiplier will be significant,” the report says.