SIP Tax Benefit: Learn the Benefits of SIP Investment

When it comes to investing in mutual funds through SIP, people generally talk about how flexible and affordable this form of investment is. But, apart from the flexibility and affordability, SIPs in mutual funds can also prove highly tax efficient. Read this post to know more.

Tax Efficiency of SIP

There are now many investment options that are eligible for tax deductions and exemptions under the IT laws. But while these tax-saving instruments do fulfil the primary purpose of helping you save taxes, the returns are mostly modest.

Equity-Linked Savings Scheme or ELSS is one type of mutual fund category that not only helps you save taxes but also has the potential to generate higher returns. With a lock-in period of just three years, ELSS funds also have the shortest lock-in period. Additionally, you can take advantage of the tax efficiency of these mutual funds even if you invest through SIPs.

Tax Benefits of SIP

Take a detailed look at the SIP tax benefit of these funds-

ELSS is a mutual fund category that comes with certain tax benefits. As per Section 80C, investments up to Rs 1.5 lakh in ELSS funds can be deducted from your taxable income in a financial year. It is a type of diversified equity fund with at least 65% of the investments in equity and equity-related instruments. The rest is generally invested in debt instruments to add more stability to the portfolio.

You have the option to invest a lump sum amount or start investing in ELSS through SIPs. But note that these funds have a lock-in period of 3-years. You will have to remain invested for at least 3-years to take advantage of the available tax deduction. If you redeem the units before 3-years, and the tax deductions would be reversed in the following year.

With the help of SIP, taxpayers get to invest a smaller amount every month rather than a lump sum amount at once. For instance, the available tax deduction with ELSS under Section 80C is up to Rs. 1.5 lakhs. So, rather than investing Rs. 1.5 lakhs at once, which a lot of taxpayers might not possess, the amount can be broken down into a monthly SIP of Rs. 12,500 for 12 months.

By the end of the year, you’d have invested Rs. 1.5 lakhs in the ELSS fund of your choice and be eligible to claim the applicable tax deduction as per your income tax slab.

Apart from the tax benefit discussed above, ELSS funds come with a host of other advantages too. Some of them are as follows-

• Long-Term Capital Growth-

  As these are equity-oriented funds with at least 65% of the portfolio invested in equity, ELSS funds could deliver higher returns as compared to other popular 80C tax-saving instruments.

• Shortest Lock-in Period-

  Unlike other tax-savings investments like 5-year fixed deposits, PPF, ELSS has the shortest lock-in period of 3-years. But, most investors generally prefer holding their ELSS investments for more than 3-years as the funds can deliver better returns in the long-run.

• Diversification-

  ELSS funds also invest in debt instruments. So, by investing in an ELSS fund, you get equity as well as debt exposure. Together, they add a lot of diversification to your investment portfolio.

While you might be aware of the benefits of SIP investment, it is time that you also know about how SIP can help you save taxes. Look for a top ELSS fund from a reputed fund house to start your SIP and take advantage of the several benefits that SIP and ELSS funds can offer together.

But do note that as these funds have considerable equity exposure. So, do understand your risk appetite before making the investment decision.