The landscape of personal finance and tax planning in India is undergoing a significant transformation. With the new tax regime becoming the default option from 1 April 2023, and further sweeteners taking effect from the 2025-26 financial year, many taxpayers are re-evaluating their investment strategies. The core shift is this: the compulsion to invest solely to save tax is fading, potentially leading to underinvestment for the future.
The Allure of Simplicity: Why Taxpayers Are Switching
Introduced in the Union Budget 2020-21, the new optional tax regime initially saw few takers. It offered lower tax rates in exchange for forgoing most deductions and exemptions available under the old regime. However, persistent government efforts to make it more attractive have changed the calculus. Key changes from 2025-26 include a zero-tax liability for those with business and professional income up to ₹12 lakh annually (₹12.75 lakh for salaried individuals), thanks to a higher rebate under Section 87A, alongside wider and more relaxed tax slabs.
For instance, income between ₹10 lakh and ₹12 lakh, which attracted a 15% tax in 2024-25, will now be taxed at 10%. The 30% slab will now kick in only for income exceeding ₹24 lakh per year, a substantial jump from the previous ₹15 lakh threshold.
For professionals like 31-year-old Chennai-based IT expert Sharan Ghatge, the appeal is straightforward: less paperwork. "Only if I could claim the full HRA exemption would the old regime be better. Otherwise, the tax difference is minimal," he notes. This sentiment is echoed by 30-year-old banker Nitya Balasubramaniyan, who found her tax rate lower under the new regime after a salary hike, freeing her from mandatory tax-saving investments.
The Investment Pivot: From ELSS to Index Funds and PPF
A major casualty of this shift appears to be the Equity-Linked Savings Scheme (ELSS). Tax deductions under Section 80C, which includes ELSS investments up to ₹1.5 lakh, are only available under the old tax regime. Consequently, investors moving to the new regime are logically reducing or stopping their ELSS contributions.
So, where is the money going? The investment focus has shifted towards goal-based, rather than tax-driven, choices. Nitya Balasubramaniyan has diversified her portfolio into sectoral funds, flexi-cap funds, and gold ETFs. Sharan Ghatge has moved his systematic investment plan (SIP) from ELSS to Nifty 50 index funds. Another saver has redirected funds into large-cap index funds tracking the Nifty 500 and S&P 500, alongside some direct stock picking.
However, financial planners urge caution. Commenting on Nitya's portfolio, certified financial planner Kalpesh Ashar warned that heavy exposure to sectoral funds can be risky. He recommends a more balanced, long-term equity allocation: 30% each in large-cap and flexi-cap funds, 15% each in small- and mid-cap funds, and 10% in sectoral funds.
The Enduring Appeal of PPF and NPS
Despite the changes, some traditional instruments retain their sheen. The Public Provident Fund (PPF) continues to be viewed as an attractive debt investment option, prized for its safety and compounding benefits over a 15-year period. Many investors plan to extend their PPF accounts in blocks of five years after the initial lock-in.
The National Pension System (NPS) also finds favour, especially under the new regime. A unique advantage is the deduction of up to 14% of the basic salary plus dearness allowance contributed by an employer towards an employee’s NPS under Section 80 CCD(2). "This enhanced limit for private sector employees serves the dual purpose of promoting NPS and opting for the new tax regime," explains Deepashree Shetty, Partner at BDO India.
The Risk of Lost Discipline and the Path Forward
A concerning side-effect of the new regime is the potential erosion of savings discipline. With no tax-saving imperative, some individuals, especially younger earners with incomes around the ₹12 lakh threshold who pay zero tax, may neglect long-term investment planning altogether.
Financial advisors stress that the core principle remains unchanged. "Investing needs to be goal-based and should not be linked solely to tax planning," asserts Kalpesh Ashar. He suggests starting simple: initiate a SIP in an index fund, even for as little as ₹500 a month, with a long-term perspective while enjoying the liquidity mutual funds offer.
The evolution of India's tax structure is empowering taxpayers with simpler choices and lower rates. Yet, it simultaneously places greater responsibility on individuals to proactively build their investment portfolios, ensuring that financial goals, not just tax deadlines, dictate their savings journey.
