Invest for returns, not to save tax

As you get back to work after revelling in the New Year celebration, the first thing you indulge in is to submit proof of investments to your accounts department. If you do not show proof of your tax-saving investments, they deduct more tax from your salary than projected when the year began.

You, then, put whatever you can manage into a fixed deposit or a public provident fund where it is locked in for the next three years. You submit the proof necessary and believe that you have done the right thing.

But, that’s not the right way.

Guaranteed or fixed income schemes like Public Provident Fund (PPF) or National Savings Certificate (NSC) do offer tax benefit and capital protection. But when you lock up your money for a long time, it needs to work harder for you and protect you against inflation.

All tax-saving investments have a lock-in period. For instance, PPF is a 15-year scheme where you can make partial withdrawals only after seven years. For NSC, it is five years.

But if the average inflation was four per cent in the past 10 years, your guaranteed tax-free return of eight per cent on PPF is already down to four per cent.

Equity-linked savings scheme (ELSS), meanwhile, is an efficient way to save tax and get capital appreciation. Yes, you are often warned that past performance is no guarantee for any future returns. But, ELSS offers superior returns to fixed deposits or Public Provident Fund over long term.

This is in line with the overall trend of equity markets outperforming other markets over a long duration. They are ideal for retirement planning or child’s future education when you are in your 20s.

If you look at CRISIL AMFI Equity Linked Savings Scheme Fund index’s last 10 years’ performance, it has clocked a return of 10.56 per cent. Just like PPF, ELSS schemes are tax-free, too. Hence, their return is well over six per cent the prevailing inflation.

Simply put, the value of your ELSS investment is substantially higher in 2017 than it was in 2007, even after inflation. That’s because any rate of return closer to the prevailing inflation or below does not help you create wealth.

Attitude matters

Many people invest in a manner they have seen their parents or close friends do. Over the years, PPF has emerged as the most popular tax-saving instrument. Some people take on home loans and buy property with an idea to save tax.

The motive behind investing matters a lot. Putting a lump-sum from your savings at the last minute into a tax-saving scheme may not be prudent. You can choose to equip yourself with knowledge and learn about investing for growth.

Investing needs to be a habit. It cannot be a compulsion. Your motive should always be to generate capital appreciation. There is no need to scramble towards the end of the financial year to save on tax. The best way to invest in an ELSS scheme is through a systematic investment plan through the year. You can start with as less as Rs 500 every month. If you are able to get online, there is a lot of literature that will tell you which scheme to invest in. If you are not interested, it may be a good idea to get professional advice.

Where to put your money
Equity-linked savings scheme, or ELSS, is an efficient way to save tax and get capital appreciation. It offers superior returns to fixed deposits or Public Provident Fund over the long term

Rs 500
Yes, you can start investing in Equity-linked savings scheme with as little as that

15 years
That’s the tenure of PPF, but you can make partial withdrawals after seven years

(The writer is a former business journalist and founder,  Simplus Information Services)​