The old tax regime exists with exemptions wherein you can invest in those avenues and reduce your tax outgo; under the new tax regime, the rates are lower, but exemptions are not available.
We are used to the ‘March phenomenon’ i.e., the rush for tax-saving investments in March to reduce the tax payable for the financial year. However, that approach is set to change gradually.
Now there is an existing or old tax regime with exemptions available where you can invest in those avenues and reduce your tax outgo.
New versus old
When we say exemptions, we mean the “usual suspects” such as Section 80C, 80D, housing loan interest, HRA, education loan interest and leave travel allowance. And there is a new tax regime where the tax rates per se are lower, but exemptions are not available.
As of today, both the old and new regimes co-exist. It is your choice as to under which one you will pay your taxes i.e. claim exemptions and pay tax at relatively higher rates, or forget exemptions and pay tax at a relatively lower rate.
However, figuring out which one is better, the old or the new tax regime, is a professional’s job.
You have to consult your chartered accountant to figure that out. Broadly, how it works is that you have an estimate of how much you will earn over the financial year. If you are in a salaried job, the estimate is easier. If you are a practising professional or in business, you have to make an estimate based on last year’s earnings.
Your chartered accountant could give you an estimate of the “break-even” between the old and new tax regimes. Under the old regime, provided you make certain minimum tax-saving investments, you would break-even with the new regime.
Then you have to figure out whether you want to, or you are in a position to execute all those investments.
If the old regime seems better for you, then you have to plan your cash flows. Rather than waiting for March 2024, it is better to even out the cash outflows over the course of the year.
There is no compulsion to execute those tax saving investments. You may not have the need for it, other than tax planning. You may not like those investments for certain reasons.
In that case, you can simply settle for the new tax regime. In the absence of all those investments, the new regime is better for you. The point we want to drive home through this piece is that for the investments you make, tax planning is only one of the reasons, not the sole reason.
As per the government, the new tax rate regime is the “default” option now and the old tax regime is only one of the “options” with you.
The government is gradually disincentivising tax efficiency as the driver for investments. Earlier, ULIP premiums beyond ₹2.5 lakh per year were made taxable. In the latest Union Budget, insurance premium payments beyond ₹5 lakh per year have been made taxable, on the returns earned. Indexation benefit on debt mutual fund investments has been done away with in the latest Union Budget.
It is possible that somewhere down the line, though nobody knows when as of today, tax-saving-investments e.g. Section 80C, may be done away altogether. If that be the case, this is the preparatory phase for us.
On your part, you have to gradually develop that mindset and approach. Buy insurance, because it is required for you, not because of the tax breaks. Buy term insurance, rather than unit-linked-insurance-policy (ULIP) as that is pure insurance whereas ULIPs combine insurance and investments, at a higher cost to you.
Buy property, because you want to stay there or you want to own a second home, not because of the tax breaks. Invest in debt mutual funds, not because the tax rate on returns is lower, but because you require it in your portfolio.
Once you declutter your mind from the tax efficiency aspect, you would be able to take a pure, undiluted view on why you have to spend your money on a particular investment.
If you phase it out over the course of the year, like the concept of the systematic investment plan (SIP) in mutual funds, it will be easier on your cash flows.