Tax Saving Investments Help In Creating Wealth Over The Long Term

Making the right choice in selecting the right tax-saving investment goes a long way in creating wealth for you. The Income Tax Act, 1961 provides for certain deductions that an individual may claim and thus reduce the taxable income thereby reducing tax liability.

- Sanjeev Puri

These benefits are largely confined to Section 80C of the Income Tax Act. According to Section 80 C, an amount equal to the investment that you make in certain specified instruments or an expense that you incur up to a maximum of Rs 1.5 lakh in a financial year reduces your taxable income by the same amount.

The deductions available under Section 80C include benefits for expenses incurred as well as for investments made. The investment related tax breaks are largely on specified investments, such as five-year notified tax saving bank deposits, life insurance premium, Employees’ Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC), Senior Citizens’ Savings Scheme (SCSS) and Equity-linked Savings Scheme (ELSS) from mutual funds (MFs). Repayment of the principal on a home loan and payment of tuition fees also qualify for tax benefits under Section 80C.

Why fixed income tax savers do not create wealth: The post-tax returns of the tax savers make them unfit for creating wealth over the long term. Also, the inflation-adjusted returns are low in them. For instance, most fixed and assured returns products such as National Savings Certificate (NSC) provide you with Section 80C benefits but their return is taxable. Ignoring the impact of inflation is damaging to one’s wealth. Inflation erodes the purchasing power of money, especially over the long term.

Market-linked tax savers: The other is the ‘market-linked returns’ category, primarily being the equity-asset class. Here, one may choose from equity-linked savings schemes (ELSS) of mutual funds (MF) and the unit-linked insurance plan (Ulip) including pension plans and the National Pension System(NPS). Return from equity has outclassed every other asset class over a longer time horizon. Staying long in equities also minimizes the volatility attached to equities.