More money in your hands after Budget 2025? Use the tax-savings wisely to boost your investments, not spends

Before switching to the new tax regime, it's essential to weigh the pros and drawbacks.

Indian taxpayers’ disposable incomes are set to go up with the hike in ‘nil’ tax limit to Rs 12 lakh and widening of tax slabs announced in Budget 2025.

Individuals with different income levels can expect significant tax savings. For instance, those earning Rs 12 lakh per annum can save around Rs 83,200, while those with an annual income of Rs 15 lakh can save Rs 32,500. Similarly, individuals earning Rs 24 lakh annually can save Rs 1.14 lakh, while those with an income of Rs 1 crore a yera will see their tax outgo shrinking by Rs 1,25,840. A taxpayer with an income of Rs 5 crore will see a reduction of Rs 1.43 lakh in tax payable.

The increased savings resulting from the new tax regime may tempt individuals to splurge, but experts caution against overspending. "It's crucial to strike a balance between spending and investing," advises Nitesh Buddhadev, founder of Nimit Consultancy.

Don't ditch long-term investments for new tax regime

The benefits listed above are applicable to those who have migrated to the optional tax regime announced in 2020-21, which does not allow for deductions such as tax avoidance schemes and other deductions. Many people have opted for investments like equity-linked savings schemes (ELSS), public provident fund (PPF) and the Sukanya Samriddhi Yojana given their potential to reduce tax liabilities. However, these investments often have a secondary benefit: fostering a disciplined approach to saving. According to Rishabh Parakh, founder of NRP Capitals, "The obligation to invest in these tax-saving instruments encourages individuals to build a financial safety net that they might not have created otherwise.”

While the new tax regime does not provide direct tax benefits for investments in schemes like ELSS, PPF, Sukanya Samriddhi Yojana and insurance, they still offer significant value beyond tax savings, notes Kunal Savani, partner at Cyril Amarchand Mangaldas. They play a vital role in achieving long-term financial stability, retirement goals and securing one's family's future. They also provide essential risk protection. Savani says, “Switching to the new tax regime shouldn't mean discontinuing prudent investments that safeguard one’s future.”

Also read | What Budget 2025 means for salaried taxpayers, senior citizens and investors

Beyond tax benefits: Why long-term investments are essential

“Despite the absence of tax deductions under the new regime, ELSS funds will continue to offer potential for higher returns because of equity market participation,” says Amit Bansal, partner, Singhania & Co. Alternatively, to achieve your long-term financial goals you can channel your savings systematically into diversified equity mutual funds, of which ELSS funds constitute a subset. Unlike ELSS funds, regular equity funds do not come with the three-year lock-in period.

PPF and Sukanya Samriddhi remain attractive options

Government-backed schemes like the PPF and Sukanya Samriddhi Yojana offer a secure and risk-free investment option, providing returns comparable to or even surpassing those of bank fixed deposits. According to Ankit Jain, partner at Ved Jain & Associates, "PPF remains a compelling long-term investment, as the interest earned is tax-free, even under the new tax regime. Meanwhile, the SSY serves as a vital financial tool for securing a girl child's future, making it a socially responsible and financially valuable investment."

Also read | How FM Nirmala Sitharaman's Budget will help the middle class

Personal health insurance a must  

Rising medical costs and healthcare inflation have made health insurance a vital financial safeguard. A single medical emergency can wipe out years of savings, which makes health insurance simply indispensable.

While employer-provided health insurance may offer some protection, it may be insufficient or lapse upon retirement or job change. Jain emphasises the value of having a personal health insurance plan, which ensures continuous protection and financial security against unexpected medical expenses.

Also read | Budget 2025: Striking a balance between investment and consumption in Modi 3.0 regime

Do not ignore term life insurance

Life insurance serves as a vital financial safeguard, providing dependants with financial stability and security in the face of a sudden death. It ensures that the family's primary breadwinner's income is replaced, maintaining their standard of living. According to Jain, term insurance is the most economical option, offering significant coverage at relatively low premiums, making it a more attractive choice compared to the costly endowment or unit-linked insurance plans.

Switching to the new regime? Invest, rather than spend, more

The new tax regime's boost to disposable income presents an opportunity for individuals to fortify their financial futures. “With more funds at their disposal, they can enhance their retirement contributions, allocating additional resources to instruments like the NPS (National Pension System) or other pension plans,” says Bansal. This increased investment can help build a substantial retirement corpus. Moreover, individuals can diversify their investments across asset classes, such as equities, bonds and real estate, to strike a balance between risk and return, ensuring a steady income stream in retirement, he adds. Higher in-hand salary should lead to larger amounts being directed towards diversified equity mutual funds through the systematic investment plan (SIP) route for goals with longer investment horizons.

Additionally, you can build an emergency fund to cover unexpected expenses. By adopting a strategic financial planning approach, you can harness the power of increased savings to create a more secure and comfortable retirement.

Also read | Budget 2025: A refreshing change for every taxpayer

Old vs new tax regime: Evaluate which one is right for you

Before switching to the new tax regime, it is essential to weigh the pros and drawbacks, says Buddhadev. Compute the value of deductions you already claim and compare the tax payable under both the regimes before taking a call. Salaried employees can switch between the regimes every year.

For those who earn between Rs 24 lakh and Rs 5 crore and claim total deductions of over Rs 8 lakh (plus standard deduction of Rs 50,000 for the salaried under the old regime), switching to the new system may not be a good bet.

So, if your collective tax breaks—house rent allowance, home loans repayment instalments, leave travel allowance, and investments like PPF, ELSS, and NPS—exceed this break-even limit, you can consider the old regime. Put simply, your tax savings under the old regime should be substantial enough to justify the record-keeping and paperwork that the old regime necessitates.

However, irrespective of the regime you choose, do not lose sight of your financial goals and the investments you need to make to achieve them.

Buddhadev emphasises that tax laws are subject to change and tax savings should be a byproduct, not the primary driver, of financial planning. "Investment decisions should prioritise long-term wealth creation and security, aligned with your financial goals, rather than solely focusing on short-term tax benefits," he advises.