5 Tips to invest wisely under the new tax regime

With no tax exemption and deduction applicability, the investment decisions in the new tax regime will need a fresh perspective

The new tax regime introduced in last year’s budget has a different take on tax-saving investments. To clarify, it is not a mandatory tax regime and the old regime can still be opted for. That said, if you want to opt for the new tax regime you will have to redraw your financial planning and tax-saving strategies. 

Tax deductions and exemptions available earlier will not be available in the new regime. This automatically means a higher taxable income. However, this is compensated by keeping the tax slabs more lenient. Due to different tax slabs in the two regimes, you have to find out which regime will result in lower tax liability for you. You can accordingly select that regime. 

Besides, your approach towards investments will change if you select the new regime. You can think of investments from a wider perspective and no longer need to consider tax saving as the main criterion. Here’s what you can do while planning your investments under the new tax regime,

1. Focus on your financial objectives

Since tax saving is not the primary consideration any more, the new regime lets you focus on your financial needs, investment aspirations, and risk management while investing. Let’s assume that you had a PPF/EPF of Rs 1 lakh per annum in the old regime. To avail of the Rs 1.5 lakh deduction under section 80C, you also used to buy National Saving Certificates of Rs 50,000. This year, you can use the latter amount as per your financial goal. If you want to expand your pension annuity further, this Rs 50,000 can be diverted to it. If you had the risk appetite but lacked money to invest, you can invest in more market-linked products like equity mutual funds or stocks instead. 

2. Diversify your investments

In the old regime, people with limited income didn’t have the option of diversifying their investments. Their primary concern was to park their investments under tax-friendly sections of the Income Tax Act. With the new regime, you can diversify your portfolio and spread your investments across different asset classes. You can earmark funds for safe investments like your PF account, some fixed deposits, government saving schemes etc. But you can also invest in the money market, debt funds, and government securities. You can invest a portion of your disposable income in the equity market, commodities and derivatives, to raise risk and reward. Investment in gold is considered to be a good portfolio diversifier and you can do this as a long-term inflation hedge.

Related: Should you stick to the old tax regime or move to the new one?

3. Continue with tax-friendly investments

Some of the recognised tax-friendly investments can be continued as their benefits extend beyond tax savings. Equity-linked saving schemes have a small lock-in period, and there’s no mandatory minimum or regular contribution. It offers a healthy return as well. National saving certificates and fixed deposits don’t need any set contribution, and its return can be reinvested upon maturity to avoid withdrawal taxes. PPF can also be continued since its contribution, return, and withdrawal are all tax-free. Besides, it is a safe option for long-term investment.

4. Rethink your approach to insurance

In the old regime, we may have been tempted to purchase different insurance products keeping the tax benefits in mind. However, in the new regime, a good life cover is sufficient for your insurance needs. Any additional insurance product should be compared to other competing investment products. Their tax-saving properties would no longer be important for you. The same would apply to your health insurance coverage as well. However, even in the absence of tax benefits, keeping an active life and health insurance cover should remain a priority.

Related: Incomes that will be tax-free under the new tax structure

5. Utilise a parent’s tax slab and incentives

If your parents are retired, or have a limited income, you can utilise their income tax slab to lower your tax liability. Gifts given to parents are not taxable in the hands of the giver or the receiver, nor is the income clubbed with yours. The money so gifted should be invested in tax-free investments, as the income thereon would otherwise be taxable in your hand. Banks and financial institutions offer a higher rate of return to senior citizens on fixed deposits. Senior citizen savings schemes are also a high-yield investment option for your parents that you can contribute to.

Last words

The new tax regime unveiled by the government not only lowers the tax rates but also allows you to exercise more freedom in your investment choices. With only the taxability of the maturity return in mind, you can take a more balanced approach towards your investment choices and decision. Look at these tax exemptions and deductions that remain available in the new tax regime.

Disclaimer: This article is intended for general information purposes only and should not be construed as insurance or investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.