Tax Relief Today, Savings Crisis Tomorrow?

How much has tax-saving driven investor discipline, and what could sustain it without these benefits? It has little to do with the history of mutual funds and more to do with the Indian savings psyche. Most people are taught at home to save. What you do with that saving is another story - whether you put it in the locker, keep it in the bank, etc. And going by the tax-saving funds, this is a relatively new phenomenon. It became possible only from 2005. Before that, the maximum you could invest in a tax-saving fund to get the Section 80C benefit (erstwhile called Section 88A) was only Rs 10,000. Suggested read: Direct Tax Code affects Tax-Savers So, in the '90s or early 2000s, the Rs 10,000 investment that I made and still hold, I find them to be magical. That's simply because I've held them for 30 years. In fact, the secret lies in the years, not just in equity. And then, there was no other simple equity investment available. There was another charm of these equity investments in the tax-saving fund: One is that investors used to get excited about equity once in a while. Every few years, they would get excited - like in 1992, 1999, 2006, or 2007. And when investors get excited, they invest anywhere. They would normally get excited when everyone seems to be making money, and they feel they're missing the bus. In that situation, what happens is that you invest at an inopportune time, lose money, and then take it out. This leaves a permanent embedding in your mind: investing in equity means losing money. It becomes a nasty place to be. What the tax-saving funds did was put a lock-in period in place. Not taking your money out for three years actually changes the whole complexion of your experience. Your experience improves. The worst case is that you earn a little less or as much as the PPF, but the best-case scenario is that you invest for three years, it does well, and you keep holding it for a long time. Then, it turns out to be very rewarding. Tax-saving funds were a huge catalyst because savings and in

This article was originally published on February 14, 2025.