Whether you invest in a fixed deposit (FD) or an equity-linked savings scheme (ELSS), your maximum allowable tax deduction for most tax-saving investments remains at a maximum of ₹1.5 lakh under section 80C of the Income Tax Act.
Alternatively, you can opt for the National Pension System (NPS), which has the provision to give you a higher tax deduction of up to ₹2 lakh under section 80C of the Income Tax Act.
Let us take a look at how one can create wealth by staying invested in tax-saving avenues.
The government gives exemptions on tax-saving instruments such as public provident fund (PPF), ELSS, tax-saving FD, etc. to encourage people to save and accumulate wealth for their future, said Prateek Mehta, co-founder and chief business officer, Scripbox. This is the reason why each product has a different lock-in period to support long-term savings and investments.
“These tax-saving instruments can be used as an opportunity to create wealth for the long-term. To do that, you have to pick investments that will compound return at a rate higher than inflation over a few years. For example, an annual investment of ₹1.5 lakh in a PPF over 15 years will lead to a corpus of ₹40 lakh, assuming a rate of 7%. That same investment in an ELSS fund could result in a ₹57 lakh corpus, with a rate of 11% for 15 years,” said Mehta.
Investments such as ELSS funds, not only help you save tax but also help maximise long-term wealth. While the return of 10-12% is not guaranteed, they have a good probability of converting with a minimum lock-in period of only three years.
By visualising tax-saving as a long-term investment, with its own financial goal, you can reach a much larger corpus as opposed to withdrawing it as soon as the lock-in period is over.
Do you have a personal finance query? Send in your queries at email@example.com and get them answered by industry experts