How to Save Tax without Compromising on Wealth Creation

“In this world nothing can be said to be certain, except death and taxes,” said Benjamin Franklin and quite rightly so. As you start earning, nagging tax woes are likely to become the order of the day. Thankfully, there are some legitimate ways of saving taxes and some of them fuel wealth creation too. Each has their own lock-in periods too. However, it is important to remember that tax saving is not the prime objective of these investment products, it is an ancillary benefit. We look at some such wealth creation instruments that cut down on taxable income here.

Creating Wealth with Tax Rebates

Some of the options you can choose from include:

1. Equity Linked Savings Schemes or ELSS: These schemes are types of equity linked tax saving mutual funds. Since the investments made in these funds go into stocks or equities, they prove to be ideal for wealth creation and deliver superior returns to the tune of 11% to 16% in the long run. And since this is way above the current inflation rate, it is more than welcome and ideal for corpus building. Although tax saving mutual funds are subjected to market risks, just like other market linked funds, historical evidence is in favour of good returns over the long term. The lock in period is also a very favourable 3 years, which happens to be the lowest among the other available options. And, of course, the returns are tax free. Up to Rs 1.5 lakhs can be saved on ELSS funds. You can choose a lump sum investment or consider monthly payouts or SIPs. Spreading investments during the course of the year also helps reduce the volatility of equity linked products.
2. People’s Provident Fund or PPF: PPFs provide assured returns that are tax free. However, there are a few disadvantages here as compared as to tax saving mutual funds. First, the lock in period is a minimum of 15 years, which may be too long. Also, the percentage of return at 8.7% for the fiscal 2016 is just at par with inflation.

There are other available options like National Savings Certificates and Fixed Deposits with 5-year lock in periods, where only the interest component is taxable. Life insurance is also an option here but the returns are hardly attractive. You need to choose depending on your risk appetite and the nature of portfolio you wish to set up.