Begin tax planning at start of financial year to avoid cash crunch later

Consider both income level and deductions you can avail of when choosing between old and new tax regime

For tax planning to be effective, it must begin at the start of the financial year rather than being left for the last quarter or month. This year, the tax planning process should begin by deciding whether to opt for the old or the new tax regime.

Choose the right regime

Budget 2023 made the new tax regime the default regime. If you wish to choose the old regime, you need to opt for it. The accounts departments of companies have started sending emails to employees requesting them to inform them of their choice, so that the appropriate tax deduction at source (TDS) can be done.

This year’s Budget rejigged the tax slabs under the new regime. “With the new slabs, the savings in the new regime are higher,” says Ankit Jain, partner, Ved Jain & Associates.

Vivek Jalan, partner, Tax Connect Advisory, suggests opting for the new tax regime irrespective of one’s income. “Taxpayers with a taxable income below Rs 10 lakh should go for the new regime,” he says. According to him, even those with a taxable income above Rs 10 lakh should stick to the new regime. “While persisting with the old regime may provide short-term benefits, it leads to disguised inefficiencies in the form of investing in life insurance policies, mutual fund schemes, etc., and taking home loans. These funds can be better utilised for other purposes,” he says.

Maneet Pal Singh, partner, I.P. Pasricha & Co, suggests that individuals should take into account their income levels and deductions while making this choice. “An individual who can avail of a lot of deductions and exemptions may find the old tax regime more beneficial. Someone whose income level is not high and who doesn’t have many deductions may end up paying lower taxes under the new tax regime,” he says.

Use one of the calculators available on the websites of tax consultancies to decide which tax regime is better suited for your income and the tax-saving deductions you can avail of.

Equity or debt investment?

If you opt for the old tax regime, you should begin the task of tax planning right away. “Your tax planning should help you achieve your life’s financial goals,” says Arvind A Rao, founder, Arvind Rao and Associates.

Whether you opt for an equity or a debt product should depend on your current asset allocation vis-à-vis your ideal allocation. “If you are underweight on equities, opt for an equity-oriented tax-saving instrument, and vice versa,” says Deepesh Raghaw, Sebi-registered investment advisor and founder, PersonalFinancePlan.

Next, let us turn to some of the key instruments that you should use for tax planning.

ELSS or tax-saver fund

Equity-Linked Savings Scheme (ELSS) has a lock-in of three years, the shortest among all tax-saving products. As it is an equity-based product, it has the potential to deliver better returns over the long term. “Those who are looking to maximise the returns from their tax-saving investments should consider ELSS,” says Rao.

The key drawbacks of ELSS are that it doesn’t offer a fixed return and can be volatile. Individuals who wish to avoid volatility may steer clear of ELSS. “The utility of ELSS will decline for people who opt for the new tax regime,” says Raghaw.

Public Provident Fund

The Public Provident Fund (PPF) currently pays an annual return of 7.1 per cent, which is tax-free. This government-backed product comes with virtually zero credit risk. “PPF is an incomparable product. Invest in it irrespective of the tax regime you opt for,” says Raghaw.

Make sure you won’t need the money until maturity.

National Pension System

One significant advantage of the National Pension System (NPS) is that it offers a deduction of up to Rs 50,000 in addition to the Rs 1.5 lakh deduction available under Section 80C to taxpayers in the old regime. “If you wish to combine tax saving with retirement planning, NPS is a must-have investment,” says Rao.

It also offers tax-free rebalancing. “This becomes especially important now that debt funds will be taxable at slab rate, making portfolio rebalancing expensive,” says Raghaw.

According to him, if you are in a higher income tax bracket (and in the old tax regime), if you’re sure this investment will not crowd out other investments, and you will not need this money until retirement, you can opt for it.

Those who opt for the new tax regime won’t get the Rs 50,000 additional tax benefit. According to Raghaw, even such taxpayers can put some money in NPS purely for the purpose of retirement planning. “And even if you’re in the new regime, your employer’s contribution to NPS will still earn you tax benefits,” he adds.

Buy insurance

Consider whether you have adequate term and health insurance. Those under the old tax regime will get a tax deduction on the premium under Section 80C and 80D, respectively. Even those under the new tax regime must ensure they have adequate amounts of these two essential covers for protection.

Expenses that offer tax benefits

Certain expenses can also provide a tax benefit. List those that you alrea­dy incur and which offer tax benefits, such as the tuition fees paid for your children’s education, the principal component of home loan EMI, the stamp duty and 

registration fees paid while registering a new proper­ty. In addition, salaried employees sho­uld also factor in their contribution to the Employees Provident Fund. 

Calculate the total amount already spent under these four categories. “If they help you cross the Rs 1.5 lakh limit under Section 80C, then you don’t need to make additional tax-saving investments under this section,” says Rao.