The Income Tax Act, 1961 provides for certain deductions that an individual may claim and thus reduce the taxable income thereby reducing tax liability. These benefits are largely confined to Section 80C of the Income Tax Act. According to Section 80 C, an amount equal to the investment that you make in certain specified instruments or an expense that you incur up to a maximum of Rs 1.5 lakh in a financial year reduces your taxable income by the same amount.
Unless returns are high in tax-savers and considering annual inflation of 6 percent, the real return is almost zero in them! Ignoring the impact of inflation is damaging to one's wealth. Inflation erodes the purchasing power of money, especially over the long term.
Equity-linked savings schemes (ELSS)
Market-linked tax savers, primarily being the equity-asset class are better at beating inflation. Here, one may choose from equitylinked savings schemes (ELSS) of mutual funds (MF) and the unit-linked insurance plan (Ulip) including pension plans and the National Pension System (NPS). Further, there are three more MF schemes that are retirement-focused and yet help you save tax. Reliance retirement fund, Franklin Templeton retirement fund and UTI retirement fund. Of these only the Reliance retirement fund allows 100 percent of your investment into equities, the other two are more of balanced funds in nature. Return from equity has outclassed every other asset class over a longer time horizon. Staying long in equities also minimizes the volatility attached to equities.
As an investor in equity mutual funds, you should keep your investments in them aligned to your long-term goals. While doing so, if your investment can help you save taxes for you, nothing like it. There are specific mutual funds schemes called Equity-linked savings schemes (ELSS) which serve both purposes. ELSS helps you save for long-term goals and also saves tax with only a 3-year lock-in period.
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