For a majority of Indians, the months of January, February and March are devoted towards attaining one key goal – saving as much tax as possible. Unfortunately, many of us have a relatively near-sighted approach towards attaining this goal and often do not consider if our tax saving investments are actually generating appreciable returns. In the following sections we will illustrate how tax-saving investments, if planned correctly, can make you wealthy in the long term.
When to Start Planning for Tax Season
The best time to start is definitely at the start of the new tax year i.e. 1st April not the New Year on the 1st of January. If you start that early, you have a lot more time to balance your annual budget to suit your tax savings as well as investment needs.
Suppose you want to make tax saving investments worth Rs. 1.2 lakhs in a year. If you start in January (3 months to the investment deadline), then you have to save Rs. 40,000 every month to reach your target. Quite a tough task if not impossible. As opposed to that, you have the option of investing Rs. 10,000 each month to reach the same goal if you just start in April instead of January.
How Your Money Grows – The One-time Investment Way
The following is an example of how much your investment will be worth at the end of the year in case you invest Rs. 10,000 per month through an SIP in a tax saving ELSS mutual fund providing ROI of 15% annually:
Total Investment in 12 months (April to March) = Rs. 10,000 x 12 = Rs. 1.2 lakhs
Total Tax savings for the year under Section 80C = Rs. 1.2 lakhs (max. limit of Rs. 1.5 lakhs)
Tabular Representation of total investment value at the end of the year*:
| Total Investment | Value at end of Year 1 | Value at end of Year 3 | Value at end of Year 5 |
Value at end of Year 10 |
| Rs. 1.2 lakhs (@15% /annum) | Rs. 1.3 lakhs | Rs.1.75 lakhs | Rs. 2.34 lakhs | Rs. 4.9 lakhs |
| Rs. 1.2 lakhs (@8%/annum) | Rs. 1.25 lakhs | Rs. 1.95 lakhs | Rs. 2.26 lakhs | Rs. 4.71 lakhs |
* Assuming a constant ROI of 15% and 8% respectively on the investment.
As you can see from the above table, your tax saving investment in year one of Rs. 1.2 lakhs will be worth more than 4 times the original investment if we assume a ROI of 15% annually. Also even the 8% return as offered by government-backed schemes such as PPF would ensure that your initial investment of Rs. 1.2 lakhs grows considerably to reach Rs. 4.71 lakhs. However, complete withdrawal of PPF investment can be made only after 15 years.
How Your Money Grows – The Long-Term SIP Route
However, these returns can be substantially increased in case you regularise these investments and make an SIP investment of Rs. 10,000 per month for a period of 15 years.
Tabular Representation of SIP investment value at the end of the 10 year period*
| Number of years | Total Amount Invested (Cumulative) | Investment Value at ROI of 15% annually | Investment Value at ROI of 8% annually |
| 1 year | Rs. 1.2 lakhs | Rs. 1.3 lakhs | Rs. 1.25 lakhs |
| 3 years | Rs. 3.6 lakhs | Rs. 4.55 lakhs | Rs. 4.08 lakhs |
| 5 years | Rs. 6 lakhs | Rs. 8.92 lakhs | Rs. 7.37 lakhs |
| 10 years | Rs. 12 lakhs | Rs. 27.55 lakhs | Rs. 18.7 lakhs |
| 15 years | Rs. 18 lakhs | Rs. 66.46 lakhs | Rs. 34.67 lakhs |
* Assuming a constant ROI of 15% and 8% respectively on the investment.
In case you are wondering why the 15% ELSS SIP is worth almost twice the 8% investment, the answer is quite simple — the power of compounding.
This investment plan will not only help you save tax but also enable you to create a nest egg for such key expenses as your children’s education or marriage as well as your retirement.