Move beyond tax planning

One of the worries that many financial planners and advisors have with the new personal income tax regime is that it will dissuade savings and financial planning. If you want a detailed explainer on these two regimes, check out our video here.

This is because the rejig in basic exemption, tax slabs and new higher rebate could lead to unravelling of people’s habit of investing their savings in equity and insuring their life and health adequately.

Over the years, the Centre has nudged Indians into investing their savings into many products like equity-linked savings schemes, ULIPs, long-term FDs and NPS to ensure people created a large enough nest egg to secure their financial future. The Income Tax Act has many provisions that encourage people to park their savings in products that give handsome returns and also buy insurance products.

This nudge by dangling deductions and exemptions of income worked brilliantly, and many have compounded their savings to build wealth over many years. Now, the Centre, in an effort to simplify the myriad tax rules, is nudging people to move towards the new personal income tax regime that has none of those deductions and exemptions.

Does this mean you should abandon good habits you have built over the years? The short answer is no, but read on to know why.

Stick with good habits

If you do choose to go with the new personal tax regime, don’t forget that investing in equity is still rewarding because there are few other ways to earn inflation beating returns. The new regime might not help you save taxes on your ELSS investments, that doesn’t mean one should shun equity mutual funds completely. They should be an essential part of any long-term portfolio. And don’t forget, the SIP is everyone’s best friend to build long term wealth.

Also, getting sufficient insurance cover through a term insurance on your life helps secure your family and loved ones if something untoward happens to you. A tax deduction was a nudge to help you build the habit of paying your term insurance premium regularly every year. The original purpose of securing the financial future of your loved ones will still remain.

You must not forget to renew your health insurance regularly, and increase your sum assured when offered during renewal. This will help you secure your finances against an unplanned health emergency.

Similarly, for long term investment, if you were using insurance savings products to create a corpus, they are still useful. The new personal tax regime doesn’t take away the utility of this product in terms of giving quality returns.

As always, do consult your financial advisor or wealth partner before you make investment decisions. If you choose to opt for the new personal income tax regime, an advisor becomes even more important to structure your investments.

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