Every year, as the month of March approaches, many investors ask this question: “Where should I invest to save tax?” But remember, investing solely to save tax may harm you in the long run. Given the changing tax system and the expanding scope of the new tax regime, this question has become more important than ever.
Over the past few years, the government has simplified the new tax regime, making it the default option with lower rates. On the other hand, the deductions available under the old tax regime have remained largely unchanged. As a result, approximately 88% of taxpayers have now shifted to the new tax regime.
Old Tax Regime: Trap of deductions or opportunity?
The old tax regime offers deductions under several popular sections, such as:
Section 80C – EPF, PPF, ELSS, 5-year tax-saving FDs, NSC, life insurance premiums, etc. (up to a maximum of Rs 1.5 lakh)
Section 80CCD(1B) – Additional Rs 50,000 deduction for NPS
Section 80D – Health insurance premium
Interest on home loan (Section 24)
HRA, LTA, education loan interest (80E), etc.
All these deductions are available only if you choose the old tax regime.
New Tax Regime: Lower rates, less hassle
In the new tax regime, the government has eliminated most exemptions and deductions. Only limited relief, such as the standard deduction, is available. Instead, income tax rates have been kept low and income slabs have been made attractive.
The government’s objective was clear—to simplify tax filing and encourage people to make investment decisions based on their financial goals rather than tax considerations.
Should we now change our investment mindset to save tax?
We spoke to Harsh Bhuta, Managing Partner, Bhuta Shah & Co LLP on this question. He says: “With the new tax regime becoming the default and offering limited deductions, along with reduced tax rates, investors should now shift their approach of investing purely to save tax and build wealth. A diversified investment portfolio, cost reduction, and liquidity should drive investment decisions.”
He further adds: “Reduced tax rates, along with increased income slabs, provide flexibility to investors to make investments based on their risk appetite. In essence, tax planning should complement financial planning, not dominate it.”
According to him, the objective of the new tax regime is to encourage investors to make goal-based and rational investments, rather than hastily investing at the end of the year to save tax.
“The new tax regime essentially nudges investors toward more rational, goal-based investing rather than last-minute, tax-deadline-driven decisions that may not suit their financial profile in the long run.”
How risky is investing solely for 80C benefits?
Many investors rush to buy PPF, tax-saving FDs, or ULIPs in March to meet the Rs 1.5 lakh limit under 80C. But is this the right strategy?
Harsh Bhuta says: “Choosing financial products purely for tax deductions under sections like 80C or 80CCD can be risky if they do not align with an investor’s goals, risk tolerance, and liquidity needs.”
He points out that many tax-saving instruments have lock-in periods: “Many tax-saving instruments like NSC, 5-year fixed deposits, PPF, and ULIPs come with lock-in periods and varying risk profiles ranging from market-linked volatility to low-return fixed income structures.”
For example: “For instance, someone with a 2-year financial goal investing in a 5-year lock-in instrument is not beneficial solely to save tax.”
Similarly, they advise caution on NPS: “Similarly, choosing NPS under 80CCD without understanding its partial lock-in until retirement can strain liquidity.”
Their clear message is: “Tax saving should be a by-product of sound investing, otherwise it can derail long-term wealth creation by restricting access to capital when it’s most needed.”
Expressing similar sentiments, Mihir Tanna, Associate Director of Direct Tax at SK Patodia & Associate LLP, says it is very risky for investors to choose financial products primarily based on tax benefits.
“Tax driven investments usually require a minimum investment tenure, and the investor cannot withdraw the money before that period ends. Thus, investors must plan to invest in tax-saving options after ensuring they have a sufficient emergency fund.”
“Certain tax saving investment avenues come with high risk. Every investor should maintain different baskets with different risk appetites to balance risk and return,” he adds.
“Once you have sufficient funds for short-term goals, plan your investments early to meet long-term goals efficiently. If you are short on liquidity for an emergency fund or short-term goals, investing in long-term tax-saver avenues may be a risky call,” he suggests.
The real question: Tax savings or wealth creation?
If you invest solely to save taxes, you may: Your money may be locked up for a long time and your risk appetite may not match your expectations. You may not receive liquidity when needed. However, if you first define your goals—such as buying a home, your children’s education, or retirement—and then choose investments accordingly, tax savings can automatically become an additional benefit.
Summing up…
Deductions still exist under the old tax regime, but the growing appeal of the new tax regime has changed investment thinking. It’s time for investors to understand that tax planning should be a part of financial planning, not a substitute for it.
Investing solely to save taxes may provide relief in the short term, but choosing the wrong product can slow down your wealth creation journey in the long run.