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

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Moneywize   |181 Answers  |Ask -

Financial Planner - Answered on Aug 23, 2024

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Asked by Anonymous - Aug 15, 2024Hindi
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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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Ramalingam

Ramalingam Kalirajan  |7933 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Feb 12, 2025

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Hello, I am 36 years old, married & have 1 daughter (5 years old). I'm investing in following funds & have investment horizon of more than 15 years. 1) SBI Small Cap - 7500 (3Yrs) 2) Axis Small Cap - 4500 (3Yrs) 3) Mirae Asset Large & Midcap Fund - 2500 (4Yrs) 4) Mirae Asset ELSS Tax Saver Fund - 3000 (3Yrs) 5) SBI Energy Opportunities Fund - 3000 (10Months) I'm planning to invest Rs. 30,000 per month more from next months. Can you please suggest in which SIP/ETF I should invest this 30k amount? And any changes I should make in my existing SIP investment? Please provide your valuable feedback.
Ans: You have done a good job by consistently investing in mutual funds. Your investment horizon of more than 15 years is a big advantage. This long-term approach will help you build significant wealth.

Your current portfolio has a mix of small-cap, large & mid-cap, sectoral, and ELSS funds. However, a few adjustments can improve diversification and risk management. Below is a detailed assessment of your portfolio and investment strategy.

Assessment of Your Existing Mutual Fund Portfolio
Small-Cap Exposure: You have Rs 12,000 per month in small-cap funds. This is around 44% of your SIP portfolio. Small-cap funds can give high returns but also have high risk and volatility. Such a high allocation is not advisable for stability.

Large & Mid-Cap Exposure: Rs 2,500 per month in this category is good. Large & mid-cap funds provide a balance between growth and stability.

Sectoral Fund Exposure: Rs 3,000 per month is in an energy-focused fund. Sectoral funds are highly concentrated and risky. They perform well only when the sector is in a growth phase.

ELSS Fund for Tax Savings: You are investing Rs 3,000 per month in an ELSS fund. This is a good choice for tax-saving under Section 80C. However, ensure you are not over-investing just for tax benefits.

Changes Suggested in Your Existing Portfolio
Reduce Small-Cap Allocation: Reduce SBI Small Cap and Axis Small Cap allocation. You can shift some funds to diversified equity funds.

Exit Sectoral Fund: Energy sector exposure is very high-risk. Instead, move this amount to a diversified multi-cap or flexi-cap fund.

Increase Large & Mid-Cap Allocation: Your large & mid-cap investment is low. Increase allocation to this category for stability.

Where to Invest the Additional Rs 30,000 Per Month?
Instead of ETFs, invest in actively managed mutual funds. Active funds can outperform in the long run due to expert fund management. Below is a recommended SIP allocation for better diversification.

Large & Mid-Cap Funds (Rs 7,000) – These provide stability and reasonable growth. They perform well across different market cycles.

Flexi-Cap Funds (Rs 7,000) – These funds have the flexibility to invest in large, mid, and small-cap stocks based on market conditions. They help in managing risk better.

Mid-Cap Funds (Rs 6,000) – Mid-cap stocks have the potential to generate good returns. However, they carry moderate risk.

Balanced Advantage Fund (Rs 5,000) – These funds automatically manage asset allocation between equity and debt. This helps in reducing risk.

Debt Mutual Fund for Stability (Rs 5,000) – This will add stability to your portfolio. You can choose a short-duration or corporate bond fund.

Why Not Index Funds or ETFs?
Lower Flexibility: Index funds follow a fixed benchmark. They do not adapt to changing market conditions.

No Downside Protection: Actively managed funds adjust their portfolio in a market downturn. Index funds cannot do this.

Potential for Higher Returns in Active Funds: A good fund manager can outperform the index over long periods.

Final Insights
Reduce small-cap exposure for better risk management.
Exit the sectoral fund and move to diversified equity funds.
Increase large & mid-cap allocation for stability.
Invest new SIPs in flexi-cap, mid-cap, and balanced advantage funds.
Avoid ETFs and index funds, as actively managed funds offer better growth potential.
Add a debt fund to bring stability to the portfolio.
These changes will help you build a well-diversified portfolio. You will achieve wealth creation with controlled risk.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

...Read more

Ramalingam

Ramalingam Kalirajan  |7933 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Feb 12, 2025

Asked by Anonymous - Feb 12, 2025Hindi
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Hi, I am a doctor (Senior Resident) practicing at AIIMS Delhi. I earn approx Rs 1,20,000 per month. With perks and allowance, in hand amount comes to Rs 1,50,000. I pay rent of Rs 12,000, spend Rs 8000 to Rs 10,000 on food, Rs 5,000 on shopping and other expenses. I send 30k home every month to my parents for my education loan EMI. How can I invest my money in SIPs or government schemes?
Ans: Income and Expenses Analysis
Your monthly in-hand salary is Rs 1,50,000.
Your total fixed expenses include:
Rent: Rs 12,000
Food: Rs 8,000 to Rs 10,000
Shopping & Other Expenses: Rs 5,000
Education Loan EMI for Parents: Rs 30,000
Your total monthly expenses come to Rs 55,000 approximately.
This leaves you with around Rs 95,000 per month for savings and investments.
Building a Strong Financial Base
Emergency Fund

Keep Rs 3 lakh to Rs 5 lakh in a high-interest savings account or FD.
This should cover 6 months of expenses, including rent and loan EMIs.
Health and Life Insurance

You may have employer-provided health insurance, but get an additional Rs 10 lakh cover.
If you have dependents, get a term insurance of Rs 1 crore for financial protection.
Investment Strategy for Wealth Creation
Systematic Investment Plan (SIP) in Mutual Funds

Invest Rs 50,000 per month in a mix of mutual funds.
Choose large-cap, mid-cap, and flexi-cap funds for diversification.
Actively managed funds can generate better returns than index funds.
Public Provident Fund (PPF)

Invest Rs 12,500 per month (Rs 1.5 lakh per year) in PPF.
This provides tax-free returns and helps in long-term wealth creation.
National Pension System (NPS)

Invest Rs 5,000 per month in NPS for additional tax benefits.
This can support your retirement planning.
Debt Repayment Plan
Your education loan is a priority.
If possible, increase EMI to clear the loan faster.
After repayment, redirect the Rs 30,000 EMI into investments.
Final Insights
Keep increasing your SIPs every year as your salary grows.
Avoid investing in ULIPs and endowment policies.
Regularly review your investments for better performance.
Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

...Read more

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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