When To Keep Investing In Tax-Saving Products Even Under New Regime

As the calendar rolls over to April 2025, a new financial year begins, bringing new opportunities for taxpayers to review their financial goals. Tax planning is one of the most important parts of this process, as it helps you to make smart financial decisions to align with your goals and future security.

The tax structure in India has seen major changes in recent years, with the government gradually pushing for a simplified tax system. In Union Budget 2020, the government introduced the new tax regime (NTR), and consecutive Budgets have sought to make it more attractive than the old tax regime (OTR), though OTR trumped NTR in a lot of cases until FY25 because of the tax deductions it offered on investments in certain instruments.

This year, the story may be different. If you are choosing NTR for FY2025-26, do not make the mistake of discontinuing your existing investments in tax-saving instruments that still fit into your overall plan. Read on to figure out which regime is right for you, and the instruments you must keep investing in even if you opt for NTR.

New Regime shines

Until FY24-25, OTR trumped NTR for most income groups, given the wide array of deductions and exemptions. However, for FY26, the Budget 2025 announcements have flipped the tables. Now, NTR is more attractive than OTR in most cases.

Budget 2025 has increased the tax rebate and revised income tax slabs under NTR, effectively making salaries up to Rs 12 lakh tax-free (see Budget 2025 Changes). Unless you avail of steep deductions of more than Rs 7 lakh, you will not be able to break even with NTR (see When Should You Opt For OTR?).

That doesn’t seem to be the case for most people if we take into account common deductions, such as Rs 50,000 standard deduction, Rs 1.5 lakh under Section 80C (for various instruments, such as life insurance, equity-linked savings scheme (ELSS), Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY) and others, Rs 50,000 under Section 80CCD(1B) for National Pension System (NPS), Rs 25,000 under Section 80D (for health insurance) and Rs 2 lakh under Section 24(b) for interest paid towards a home loan. This comes to Rs 4.75 lakh, much less than the deduction limit that will help individuals benefit under OTR. It will cross the bar only if the house rent allowance (HRA) is really large.

These changes reflect the government’s intent to prompt more taxpayers to move away from OTR. According to data from the finance ministry, 72 per cent of taxpayers shifted to NTR in FY 2023-24.

Says CA Suresh Surana, “Salaried individuals should review their compensation structure early, optimising components like HRA, allowances, social security contributions, etc. Business owners and professionals must maintain accurate records of expenses and income to ensure proper deduction claims. Moreover, regular monitoring of taxable income sources, including interest from fixed deposits (FDs), capital gains, and freelance earnings, is essential to prevent unexpected tax liabilities.”

If you choose OTR, remember to inform your employer, as NTR is the default one since Budget 2024. You can change the regime at the time of filing your income tax return (ITR) or job change.

Products That Still Matter

Now that the tax-saving edge is gone from certain instruments, should you stop investing in them?

Experts say you should continue to invest in instruments that tie in with your financial goals. Says Abhishek Kumar, a Securities and Exchange Board of India-registered investment advisor (Sebi-RIA): “Some of these investments help inculcate financial discipline through lock-ins, and protect investors from impulsive decisions during market volatility, while also offering competitive returns regardless of tax benefits.”

Here are five products to invest in even if you have opted for NTR.

ELSS: ELSS continues to be a good option for those willing to create wealth over the long term. The three-year lock-in period is good for creating discipline in equity investments, as it encourages investors, especially beginners, to stay invested through market cycles. “While ELSS is traditionally known as a tax-saving tool, its real value lies in its ability to build a strong equity portfolio over time,” says Kumar.

PPF: PPF is an attractive option for conservative investors looking for debt allocation. With a government-backed guarantee and a rate of interest of 7.1 per cent, which is subject to revision every quarter, it outperforms rates of most FDs over the long term, while offering long-term security. Says Kumar: “For those looking at stable, risk-free returns, PPF is an ideal instrument, especially given its 15-year maturity horizon that helps build a substantial corpus.”

NPS: Retirement planning is an important part of your overall financial planning, and NPS provides a flexible and cost-effective way to secure your financial future. It offers customisable asset allocation, low fund management charges, and continues to retain some tax benefits even under NTR.

Contributions to NPS are eligible for deduction under Section 80CCD(2) for employer contributions. Says Kumar, “This allows salaried employees to claim a tax deduction on their employer’s contribution to their NPS account up to 14 per cent of their basic salary.”

However, it is important to note that this benefit is only available if your employer includes NPS as part of your compensation package; employees cannot independently opt for this tax-saving opportunity.

“Employee’s own contributions to NPS under Section 80CCD(1) are not eligible for deduction under NTR,” Kumar adds.

Life and Health Insurance: Though many people view life and medical insurance as tax-saving instruments, their real value lies in the protection of your finances and dependents.

So, instead of giving in to the sales pitches of distributors, buy a term plan, the simplest and most cost-effective cover. In case of death of the breadwinner, it will provide financial security to the dependents. As a rule of thumb, always buy adequate term cover, irrespective of the tax regime you choose and ensure that your liabilities such as a home loan are covered by the sum assured.

Says Kumar: “A well-structured term insurance ensures financial security for dependents, and death benefits remain tax-free under Section 10(10D) under OTR.”

In the same way, medical insurance offers essential coverage for medical emergencies, which can otherwise eat into your savings in the absence of an adequate health cover.

SSY: For parents planning for their daughter’s future, SSY remains a high-yielding, government-backed investment which currently offers a guaranteed return of 8.2 per cent, subject to quarterly revisions. An account can be opened in the name of a girl child till she attains the age of 10 years. Says Kumar: “It’s an excellent choice for funding long-term goals such as education, and the lock-in structure ensures disciplined savings.”

NTR may have reshaped tax planning, but smart investing goes beyond just availing of exemptions and deductions. The key is to align your investments with long-term financial security, wealth accumulation and protection, irrespective of tax benefits.

anuradha.mishra@outlookindia.com