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If you are in your early twenties and new to your job, Budget 2023 provides signals that can go a long way in how you do investment and tax-planning. If your career is at the take-off stage and your financial exposure is nascent, the new tax regime offers you the opportunity to start off with a clean slate.
Despite the higher tax outgo compared to the old regime, there are three reasons why young employees may like to take a hard look at going with the new tax regime from the outset. One, you should note that calculations showing the old tax regime to be more beneficial to employees across the spectrum assume that the employee is availing of all the tax deductions available under myriad sections of the IT Act — such as section 80C, 80CCD, medical insurance premiums, interest on home loan, and so on. In practice, very few new employees would be investing in this entire gamut of instruments.
Read also: Budget’s nudge to HNIs: Change investments, adopt new tax regime
Read more: Smarter tax options for self-employed
More Read: For a steady interest stream, Budget holds a few goodies
Two, the new regime offers greater ease of filing and convenience. If you’ve done your 80C filings with your employer this year, you’d know that the investment deductions in the old tax regime require documentary proof (that is often hard to get) on HRA, tax-saving investments, bills, etc. For payroll tax deduction, many employers don’t accept documents unless they are in a certain format. You also need to be prepared for the document collection exercise throughout the year.
Three, avoiding the old tax regime allows you to choose your investment products more freely based on your risk appetite and return expectations. Many of the 80C investment products, including good ones such as EPF and PPF, require you to lock in a proportion of your current income, to be withdrawn only after 15 years-plus. With both the rebate and standard deduction brought in under the new regime, you don’t pay tax if total income is up to ₹7.50 lakh. Under the old regime, you would have to make investments to get to a no-tax status with this income. Try and discuss the structuring of your package with HR, to see how your CTC and take-home pan out under the new regime compared to the old.
Adhere to 20% savings rule
While the new tax regime gives you leeway on disposable income, it places the onus on you to save towards future goals. These could be: setting up an emergency fund (in case of a pink slip or medical issue), a career shift, higher degree, travel plans, buying a gadget or a home, or retiring early. Adhere to the golden 20 per cent savings rule. Use the low-cost NPS route to build a retirement corpus. Rather than ELSS (popular with old tax regime users), use index funds to create wealth. Debt or emergency fund needs can be met with bank/NBFC FDs or short-duration debt funds.
If you are one of those highly paid techies with a ₹50 lakh-plus annual package, the new regime will mean a lower tax outgo, thanks to cut in surcharge. For diversification, post Covid, many Gen-Z investors have been investing directly in overseas stocks. This will be cumbersome now, given the 20 per cent tax collected at source, but the MF route to investing overseas is still viable.
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