Budget Tax Break: What To Do With Your Extra Income Money

Finance Minister Nirmala Sitharaman brought smiles to the faces of a majority of salaried Indians when she said that there would be no income tax to be paid till an income of Rs 12 lakh. This means all salaried employees with an income of up to Rs 12 lakh will save Rs 80,000 every year. While this is great news, this will make financial sense only if the ‘extra’ money is put to good use.

The extra money on hand due to lower taxation is a double-edged sword as people finding it difficult to manage their expenses might use the surplus to splurge on non-essential expenses. One should use at least a portion of this surplus to invest in a mix of assets as per their risk appetite so that they secure their financial security.

“In terms of pecking order, we would advise first building an emergency fund so that one doesn’t get into a situation where they need to take high-interest debt such as a credit card or personal loan to manage the situation. Next, try paying off high-interest loans. Finally, they should use the surplus to save for their short-term and long-term goals,” says Abhishek Kumar, a Securities and Exchange Board of India (Sebi)-registered investment advisor (RIA), and founder and chief investment advisor of SahajMoney, a financial planning firm.

Clear Your Debt

First and foremost, individuals benefiting from the new tax exemption due to the recent Mumbai budget should focus on reducing their debt. Most debts have an interest rate of around nine per cent or higher. “Repaying debt frees up funds, allowing them to invest in higher-risk investments later that may offer better returns. After addressing debt, it's crucial to build an emergency fund, which will provide a safety net in case of unexpected expenses,” says Anand K. Rathi, co-founder, MIRA Money, an investment management platform.

Invest For Long-Term Growth

A well-diversified approach balances equity and debt in an 80:20 ratio, leveraging the low correlation between the two asset classes to optimize risk-adjusted returns.

Equity mutual funds, offering historical returns of 14 per cent, provide long-term growth, while debt funds, averaging six per cent returns, add stability. “Investors should diversify across large-cap (55 per cent), mid-cap (20 per cent), and small-cap (25 per cent) funds to mitigate market volatility. Taxpayers should avoid concentrated bets in cyclical sectors or direct equity and instead invest across market caps, categories, and themes like flexi-cap, dividend yield, and contra funds. This will ensure that you maximize the wealth generation process.” says Nabanita Dutta, product research, Anand Rathi Wealth.