New Tax Regime Does Not Offer Tax Deductions

Queries

R. Chandrashekhar

I started my first job a year back. Currently, my income falls in the tax bracket of 7.5 per cent. If I opt for the new tax regime, does it make sense to invest in the tax saving instruments and claim deduction or invest in equity to get returns higher than 7.5 per cent per annum?

It is great to hear that you are starting to think about investing early in your career. Just because you are in the 7.5 per cent tax bracket, does not mean you should aim for a similar return on your investments. These are two separate things.

There are many products that can be used for investment and tax saving. It is important to be clear about the purpose of the investment—is it for long-term wealth creation, short-term goals or to get insurance? Once you decide the purpose, select the appropriate instrument.

If you are opting for the new tax regime, tax deductions will not be available to you. Therefore, you need to look at where the deductions are available, and invest as per your financial objectives rather than based purely on returns or tax-saving. Keeping in mind the risk and volatility can go a long way in giving you clarity on achieving financial goals.

Murchana Bora

I am 26 years old and work in an IT company. Does it make sense for me to invest in NPS?

National Pension System (NPS) can help you in a couple of ways—tax saving and building a retirement corpus. But before you invest, consider your risk appetite and flexibility in terms of asset allocation, lock-in period, expected returns and need for liquidity. Remember that investment in NPS gets locked in for a longer period. NPS’s advantages include choice of investment between equity and debt, tax benefits and lower management charges than other instruments.

Harshit Kumar

I want to start investing and have done some basic learning. To gain practical experience, I want to invest half of my investable amount in stocks and half in equity mutual funds. Which type of mutual funds would be suitable? I can take on high risk.

Equity mutual funds give you exposure to stocks. Typically, a professional fund manager will select these stocks for you and invest in them in a basket. If you buy stocks directly, the choice is based completely on your own research and ability to identify the best stocks. While there are many who have done well in buying equities, the question you need to ask is if you will be able to beat the best fund managers who have years of experience and teams of research analysts to help them monitor and pick the best stocks. When you consider this, it might be better to start out with well-rated and well-diversified equity funds that have a good track record compared to directly picking stocks.

If you are just starting out and want to look at stocks, my recommendation would be to understand the nature and fundamentals of the stock market and the role of volatility and returns. You can do this by tracking the portfolios of fund managers or even by tracking and selecting stocks in your own model portfolio online before even investing.

Once you understand how the markets function, before investing, be very clear about the financial objective of your investment.
Doing so will help you invest with more clarity.

Rishad Manekia, Founder and MD, Kairos Capital.