There has been more than enough time to think about personal taxes and tax saving this year, given that the return filing deadline has been extended a few times. While we think of tax saving as being a goal in itself, really it should be a part of your medium to long term wealth creation objective. What that means is, when you are thinking about investing to save tax, also think about what purpose that investment is achieving. 

tax saving elss

The tax saving outcome is the same

You can use many different financial securities right from life insurance policies to home loans, fixed deposits and equity investments to save taxes. However, the section under the Income Tax Act which gives you this advantage to make tax-saving investments does not distinguish between the type of investment you make. 

Whether you invest in a tax-saving fixed deposit or an equity-linked savings scheme, your maximum allowable tax deduction through these investments remains the same at a maximum of Rs 1,50,000 under section 80 C of the IT Act. Then why not pick the investment which will help you maximise long term wealth too?

 In order to do that you have to pick investments which will compound return at a rate higher than inflation over a few years. Such investments will not only help you save tax but also grow your wealth. 

Investments in market-linked tax-saving products like mutual funds are more flexible with a minimum lock-in of three years. The flexibility will help you plan your tax-saving investments in a manner that matches your medium to long term wealth creation goal as well. 

Plan the goal

Look at your tax-saving exercise also as being goal-driven. You will not have too much tax saving to be done with the money saved for short term objectives, because that is going to be used up soon anyway. 

It’s in your medium to long term goals where investments can play this dual role. Be mindful that many tax-saving financial securities come with a long lock-in period too. Your employee’s provident fund and the public provident fund are examples of long term locked in financial products that also help you save tax. A lock-in means you can’t expect to pull out the money after a few years, even during a money emergency. 

Investments in market-linked tax-saving products like mutual funds are more flexible with a minimum lock-in of three years. The flexibility will help you plan your tax-saving investments in a manner that matches your medium to long term wealth creation goal as well. 

While saving tax is a strong goal, don’t let go of the opportunity to create wealth in doing that. Equity-linked savings schemes or ELSS are mutual fund schemes that can cater to this intersection of growing your money while saving tax. 

Historical performance data shows that such schemes have been able to deliver 12%-14% annualized return in a 10-15-year time horizon, thereby, comfortably beating inflation to bring you growth. 

Next time you think about tax saving, understand that you don’t have to let go of your wealth creation objective in choosing a tax saving financial security.