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Should I switch to the new tax regime? (32 yo, Rs 12.5 lakh income)

Moneywize |174 Answers |Ask -Follow

Financial Planner - Answered on Aug 23, 2024

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Asked by Anonymous - Aug 15, 2024Hindi

Money

Is it advisable to shift from old regime to new tax regime? Please advice. I am 32-year-old with an annual package of Rs 12.5 lakh.

Ans: Choosing between the old and new tax regimes depends on your financial situation and how much you utilise tax-saving deductions and exemptions. Here's a comparison to help guide your decision:

Old Tax Regime:

Pros:

• Offers numerous deductions and exemptions like Section 80C (up to Rs 1.5 lakh), HRA, LTA, and standard deductions (Rs 50,000)
• Suitable if you maximise deductions and exemptions
• Better for those with home loans, insurance premiums, and investments in tax-saving instruments

Cons:

• Requires more tax planning
• If your investments and expenses don't lead to substantial deductions, the tax liability can be higher

New Tax Regime:

Pros:

• Simplified tax structure with lower tax rates
• No need for tax-saving investments to reduce tax liability
• Best for those who have fewer deductions and exemptions

Cons:

• No deductions or exemptions available
• You lose benefits like HRA, standard deduction, and Section 80C benefits

Tax Rate Comparison:

In the new regime, the tax slabs are lower, but you forego deductions:

• Up to Rs 2.5 lakh: Nil
• Rs 2.5 - 5 lakh: 5%
• Rs 5 - 7.5 lakh: 10%
• Rs 7.5 - 10 lakh: 15%
• Rs 10 - 12.5 lakh: 20%
• Rs 12.5 lakh and above: 25%

In the old regime, the tax slabs are:

• Up to Rs 2.5 lakh: Nil
• Rs 2.5 - 5 lakh: 5%
• Rs 5 - 10 lakh: 20%
• Rs 10 lakh and above: 30%

Your Situation:

Given your salary of Rs 12.5 lakh:

If you're making full use of deductions (like Rs 1.5 lakh under 80C, Rs 50,000 standard deduction, and others like home loan interest, HRA, etc.), the old regime might be beneficial.

If you're not able to claim significant deductions, the new regime might result in lower tax liability due to the lower slab rates.

DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.

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Sir, Im 54 yrs, present monthly take home pay in hand of Rs.2.5Lacs after all I.Tax etc. deductions. Car EMI till Dec 2026 to be paid will be Rs.5000 per month. Have Health Insurance cover for 25 lacs, Term Insurance for Rs.2Crores but no Life Insurance cover. Monthly SIP is Rs.1Lac. Had made a lump-sum investment of Rs.55Lacs in Mutual Fund which is now valued around Rs.75Lacs. I'm not able to save anything beyond this due to family responsibilities and have to start repaying my son's education loan of Rs.20Lacs which would commence after 2.5 years (as he is studying now). Can you please let me know how much of corpus I might have at the time of my retirement if I continue to work till the age of 58years? Regards

Ans: Based on the information you’ve shared, let us assess your situation and provide insights into your potential retirement corpus.

Current Financial Position
Take-home salary: Rs. 2.5 Lacs per month
Car EMI: Rs. 5,000 per month (ending Dec 2026)
Health insurance: Rs. 25 Lacs
Term insurance: Rs. 2 Crores
Monthly SIP: Rs. 1 Lac
Lump-sum investment in mutual funds: Rs. 75 Lacs (current value)
Education loan repayment: Rs. 20 Lacs starting after 2.5 years
Retirement age: 58 years (4 years from now)
Assumptions for Projection
Your SIP of Rs. 1 Lac per month continues until retirement.
Your lump-sum mutual fund investment grows at an assumed annual rate of 10%.
Monthly SIP investments grow at an assumed annual rate of 10%.
Education loan repayment starts in 2.5 years. Let’s consider this doesn’t disrupt your SIPs.
Estimated Retirement Corpus
1. Growth of Existing Lump-Sum Investment
Current value: Rs. 75 Lacs
Growth for 4 years at 10%: Approximately Rs. 1.1 Crores
2. Future Value of Monthly SIPs
SIP: Rs. 1 Lac per month
Duration: 48 months (4 years)
Growth at 10%: Approximately Rs. 63 Lacs
Total Corpus at Retirement
Lump-sum mutual fund value: Rs. 1.1 Crores
SIP investments: Rs. 63 Lacs
Total corpus: Rs. 1.73 Crores
Recommendations
Education Loan Repayment: The repayment may require adjustments in your budget. Consider partial withdrawals or rebalancing investments if necessary to avoid disrupting your SIPs.
Increasing Savings: Once your car loan ends in 2026, channel the Rs. 5,000 EMI into SIPs to further enhance your corpus.
Financial Review: Regularly review your investments and retirement goals with a Certified Financial Planner to ensure alignment with market conditions.
Final Insights
If your investments grow at an average rate of 10%, you may have a retirement corpus of approximately Rs. 1.73 Crores by age 58. Focus on maintaining your SIP contributions and ensuring liquidity to manage upcoming education loan repayments effectively.

Best Regards,
K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

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Question by MEHARBAN - Oct 17, 2024Hindi

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Sir, I am a 42 years old financial professional and having 18 years experience. Now I am well settled in India but having some liabilities such as housing loan etc and responsibility of my two kids. I always wanted to move abroad (Europe) for a better life. Now if I leave for abroad, I have not idea whether can I get settled over there ? it can also disturb my present financial position. Kindly guide what should I do?

Ans: Meharban Sir, Thank you for your question. I have responded to a similar question recently. You may check my answer here
If you are looking for more details, I would be happy to assist/guide you. All the BEST for Your Prosperous Future.

To know more on ‘ Careers | Education | Jobs’, ask / follow Us here in RediffGURUS.

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DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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