How investing in tax-saving avenues can help create wealth over the long term

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.

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