Home Personal Finance It’s time to plan your investments, finances

It’s time to plan your investments, finances

It's time to plan your investments, finances

We are used to the ‘March Phenomenon’, ie the rush to tax-saving investments in March to reduce tax due for the fiscal year. However, that approach will gradually change.

Now there is an existing or legacy tax regime with exemptions available where you can invest in those opportunities and reduce your tax expenses.

Also read: CBDT rolls out tax calculator to help choose between old and new regime

New versus old

When we say waivers, we mean the “usual suspects” such as Section 80C, 80D, home loan interest, HRA, student loan interest, and travel expenses. And there is a new tax regime where the tax rates themselves are lower, but there are no exemptions.

As of today, both the old and new regime coexist. It is your choice under which you pay your taxes, i.e. claim exemptions and pay taxes at a relatively higher rate, or forget about exemptions and pay taxes at a relatively lower rate.

However, figuring out which is better, the old or the new tax regime, is a skill.

You should consult your chartered accountant to find out. Broadly speaking, it works so that you have an estimate of how much you will earn over the financial year. If you have a paid job, the estimate is easier. If you are a practicing professional or business owner, you should make an estimate based on last year’s earnings.

Your chartered accountant can give you an estimate of the break-even between the old and the new tax regime. Under the old regime, provided you make certain minimum tax-saving investments, you would break even with the new regime.

Then you have to consider whether you want to, or whether you are able to make all those investments.

If the old regime seems better to you, plan your cash flows. Instead of waiting until March 2024, it’s better to even out the cash outflow over the course of the year.

There is no compulsion to make those tax saving investments. You may not need it, except for tax planning. You may not like those investments for some reasons.

Then you can simply settle for the new tax regime. Without all those investments, the new regime is better for you. The point we want to drive home with this piece is that for the investments you make, tax planning is just one of the reasons, not the only one.

Read also: Employer is now looking for employee choice about new or old income tax regime

Standard option

According to the government, the new tax rate is now the “default” option and the old tax regime is just one of the “options” with you.

The government is gradually discouraging tax efficiency as an investment driver. Earlier, ULIP premiums above ₹ 2.5 lakh per annum were made taxable. In the latest Union Budget, insurance premium payments in excess of ₹5 lakh per annum have been made taxable on the earned returns. Indexation advantage on investments in debt funds has been abolished in the latest budget of the Union.

It is possible that sometime in the future, though as of today no one knows when, tax-saving investments, for example Section 80C, will be abolished altogether. If so, this is the preparatory phase for us.

For your part, you need to gradually develop that mindset and approach. Buy insurance because it is mandatory for you, not because of the tax benefits. Buy term life insurance instead of unit-linked insurance (ULIP), which is pure insurance, while ULIPs combine insurance and investments, at a higher cost to you.

Read also: Budget 2023: Gap old and new tax regime narrowing

Investment decision

Buy real estate because you want to stay there or have a second home, not because of the tax benefit. Invest in debt funds not because the tax rate on returns is lower, but because you need it in your portfolio.

Once you take your mind off the tax efficiency aspect, you should be able to have a clean, undiluted view of why you should spend your money on a particular investment.

If you phase it out during the year, like the Systematic Investment Plan (SIP) concept in mutual funds, it will be easier on your cash flows.

(The writer is a corporate trainer and author)

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