Here's why a shift in wealth-creation strategy is needed under new tax regime

Invest for long-term goals, financial freedom even if new tax regime offers no tax incentives

For instance, individuals with incomes of Rs 25 lakh would require at least Rs 8 lakh of deductions to make the old regime beneficial to them. Similarly, people with salaries of Rs 20 lakh would save Rs 2.2 lakh without any investment obligations under the new regime.

The government has a clear goal: increase take-home pay and simplify tax arrangements. This raises a question: will people focus on long-term investments and maintain financial discipline with no tax-related savings incentives, which are available under the old tax regime, or will this lead to more spending?

Tax deductions not a motivator anymore

Without the tax deduction incentive, individuals may be less inclined to contribute voluntarily to structured savings instruments like the Equity Linked Savings Scheme (ELSS) and the National Pension System (NPS), which are long-term wealth accumulators.

One way the additional disposable income could play out is increased discretionary purchases, which, over time, can weaken financial stability.

As an extension, real estate investments may become less appealing if there are no tax advantages on home loan interest. This could lead to a slowdown in real estate demand, altering the dynamics of returns on different asset classes. These factors highlight how the absence of tax incentives can influence people's daily spending and saving habits.

These patterns are similar in countries with lower saving rates due to the simplification of their tax systems.

Need for a rethink

Individuals need to reframe their investment planning within the framework of the new tax regime. They need to target wealth creation rather than investment to save tax alone.

The best approach is to link investments to long-term financial goals. Saving is a self- discipline. The role of tax deductions in regular savings can be replaced by regular investments through systematic investment plans (SIPs) and equity investments. Instead of analysing the tax benefit annually, people need to look at the long-term impact of their investment strategy.

Ignoring tax implications can also be costly. Overtrading or frequent switching between mutual funds without considering tax liabilities will reduce overall returns.

Besides, moving from a regular plan to a direct mutual fund plan is treated as redemption and re-investment, which will trigger tax liability. It is important to understand such details to maximise financial gains under the new system.

Tax reduction is another important element of wealth management. Strategic tax planning can contribute immensely to higher returns. Tax-loss harvesting is an effective method in which investors sell underperforming assets to offset gains from other investments, thereby decreasing the total taxable income.

Efficient asset allocation by keeping high-tax investments in tax-deferred accounts such as retirement accounts maximises after-tax returns.The other important strategy is deferral of capital gains, where delayed withdrawals enable investors to lower capital gains tax. Such strategies can result in high tax savings and improved financial returns.

Investors usually make the mistake of losing unrealised profits. Most investors solely focus on tax benefits, forgetting the overall return an investment might make, resulting in poor decisions. By being proactive, investors can be tax-efficient without sacrificing their long-term financial objectives.

Also read: Looking for tax-savers ahead of March 31? Check out these small saving schemes that offer 80C deductions

The freedom to choose wisely

Increased financial flexibility comes with greater responsibility.

The reformed tax system has widened the scope for individual discretion, allowing them to manage their income as they see fit. The key question is will individuals continue to make wise investments or spend more since they can afford it.

With increased digital access and financial awareness, we can be confident that smart investors will leverage this opportunity to redirect investments to higher return avenues.

The essence of the tax reform can be summed up in the phrase — invest in the vision of Viksit Bharat. As this perspective of investing trickles down to the masses, the tax policy simplification will fuel a new era of wealth creation in India.

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.