SIP tax benefits
SIP Tax Benefit: Save While You Invest Smartly
In this post, we will discuss SIP tax benefit, how investing small amounts regularly through SIPs can not only grow your wealth but also help you save on taxes under Section 80C. If you are looking for a smart way to invest and reduce tax at the same time, this one’s for you.
Let’s look at each section in detail:
What is an SIP?
SIP (Systematic Investment Plan) and lump sum are two ways to invest in mutual funds. But most people go for SIP because it lets you invest small amounts regularly. You can choose the frequency like weekly, monthly, quarterly or even half-yearly, based on your comfort.
You also get to decide how much you want to invest through SIP. Just make sure it is above the minimum amount set by the fund house. They don’t interfere beyond that.
SIP is preferred by many as it is simple and convenient. You don’t need to arrange a large amount all at once. Instead, you can keep investing bit by bit without much pressure.
SIP Tax Benefits
The primary advantages of investing in tax-saving best SIP plans are stated in the table below:
|
Feature |
SIP in Mutual Funds |
SIP in ULIPs |
|
What you invest in |
Only mutual funds |
A mix of investment + life insurance |
|
Tax benefit |
ELSS funds give tax saving up to ₹1.5 lakh under 80C |
Premiums up to ₹1.5 lakh per year give 80C benefit |
|
On maturity |
Gains taxed as per capital gains rules |
Tax-free if yearly premium is below ₹2.5 lakh |
|
Short-term gains (less than 1 year) |
Taxed at 20% |
Taxed at 20% |
|
Long-term gains (after 1 year) |
Taxed at 12.5% if gain is above ₹1.25 lakh |
Taxed at 12.5% if premium > ₹2.5 lakh and gain > ₹1.25 lakh |
|
Holding period rule |
First in, first out (FIFO). More than 1 year = LTCG |
FIFO system. Over 1 year = long-term tax |
|
Life cover |
No insurance included |
Comes with life insurance benefit |
|
Partial withdrawal |
Allowed after lock-in period |
Allowed after 5 years and tax-free |
|
Switching between funds |
Can switch only after exiting current fund |
Free unlimited switching between ULIP funds |
|
Returns |
Depends on how the market performs |
Depends on fund returns + insurance portion |
SIP Deduction Under Section 80C
Apart from the other benefits, SIP investments also help you save on tax. You can claim up to ₹1.5 lakh as a deduction under Section 80C of the Income Tax Act. Some of the tax-saving options under this include:
- ELSS (Equity Linked Savings Scheme)
- NPS (National Pension Scheme)
- PPF (Public Provident Fund)
- EPF (Employee Provident Fund)
- Sukanya Samriddhi Yojana
- NSC (National Saving Certificate)
- Tax-saving Fixed Deposits
Out of these, PPF and EPF have a long lock-in period, so you can’t withdraw the money anytime soon. FDs, on the other hand, give only average returns, which might not be enough to beat inflation.
ELSS stands out here. It has a shorter lock-in of just 3 years and also gives good returns over time. Plus, it’s the only mutual fund scheme that also offers tax benefits under Section 80C.
How to Invest in a Tax Saving SIP under Section 80C?
How to invest in SIP and save tax:
- Know about 80C: You can save up to ₹1.5 lakh in a year under Section 80C if you invest in ELSS or ULIP.
- Pick your option: Choose ELSS if you want only market returns. Go for ULIP if you also want life cover along with returns.
- Do your homework: Before investing, check the past returns and charges for ELSS funds. For ULIPs, see the premium, fund performance and insurance benefits.
- Decide how much and for how long: Plan how much you want to put in every month (for ELSS) or yearly (for ULIP) based on your savings and goals.
- Complete your KYC: Keep your PAN, Aadhaar and address proof ready to open your mutual fund or ULIP account.
- Start investing: Once your account is ready, link your bank account and start your SIP or pay your ULIP premium.
- Keep checking: Watch your investment performance once in a while. Make changes if needed to get better returns and save tax.
Other Investment Options Available under Section 80C
Here are some other investment choices that can help you save tax under Section 80C of the Income Tax Act:
|
Investment Option |
What It Is |
Highlights |
|
ULIP |
Life insurance + investment |
Returns between 9% to 15%, life cover, ₹1.5L tax benefit |
|
Public Provident Fund (PPF) |
Government savings scheme |
15-year lock-in, interest & maturity amount are tax-free |
|
Equity Linked Savings Scheme (ELSS) |
Tax-saving mutual fund |
3-year lock-in, can give good market returns |
|
Senior Citizen Savings Scheme (SCSS) |
Retirement scheme for senior citizens |
Tax benefit under 80C, steady returns |
|
National Savings Certificate (NSC) |
Fixed return government scheme |
5-year lock-in, investment eligible for 80C deduction |
|
5-Year Tax Saver FD |
Fixed deposit with 5-year lock-in |
Safe returns, tax benefits on investment |
|
Employee Provident Fund (EPF) |
Employee’s retirement savings |
Employee’s part eligible for 80C deduction |
|
Sukanya Samriddhi Yojana (SSY) |
Scheme for girl child’s future |
Tax-free interest & maturity, 80C deduction on deposit |
|
Tuition Fees |
Fees paid for children’s education |
Claimable under 80C for up to 2 children |
|
Life Insurance Premiums |
Premium paid for life insurance policy |
Can claim tax benefit under 80C on premium paid |
Benefits of Tax Saving SIP Investments
Benefits of investing in a Tax Saving SIP:
- Save tax up to ₹1.5 lakh under Section 80C by investing in ELSS or ULIP.
- Your money grows steadily over time with the power of compounding.
- These SIPs usually give good long-term returns as they invest in equity or debt.
- You can start with a fixed amount every month and change it anytime.
- Since your money is spread across sectors, risk is less.
- Even with ₹500 per month, anyone can start investing.
How to Save through SIP in ELSS
To encourage people to invest in shares for the long term, the Government started a special kind of mutual fund called ELSS, which also gives tax benefits. Along with saving tax, these funds also help your money grow over time. That’s why many people choose ELSS for both saving tax and investing.
You can start a SIP in ELSS with just ₹500. This way, you invest small amounts regularly and benefit from rupee cost averaging. You can also increase your investment anytime you want.
Capital gains tax on SIP
SIP investments are considered capital assets. So, whenever you redeem them, you may have to pay capital gains tax. The type of tax depends on two things , what kind of mutual fund you have invested in (equity or debt) and how long you’ve held it.
Here’s a simple breakdown:
|
Type of Fund |
Holding Period |
Tax Type |
|
Equity Funds (Non-ELSS) |
Less than 1 year |
Short-Term Capital Gains |
|
More than 1 year |
Long-Term Capital Gains |
|
|
Debt or Other Funds |
Less than 3 years |
Short-Term Capital Gains |
|
More than 3 years |
Long-Term Capital Gains |
Conclusion
If you are looking to save tax and invest at the same time, you can go for a SIP under Section 80C through ELSS or ULIP. ELSS (Equity Linked Saving Scheme) has a 3-year lock-in and gives good return potential since it invests in equity. ULIP (Unit Linked Insurance Plan) offers both insurance and investment, but it comes with a 5-year lock-in. In both cases, you can claim up to ₹1.5 lakh deduction in a year. Before choosing, do check the returns, charges, and risks involved.
This concludes our post. Please leave any questions or comments in the box below; and we will happily respond.
FAQs
Q1. Can I claim tax benefits on SIP investments under Section 80C?
Ans: Yes, SIPs made in ULIPs and ELSS (Equity Linked Savings Schemes) are eligible for tax deductions under Section 80C, up to a limit of ₹1.5 lakh per financial year.
Q2. Which SIP qualifies for tax benefits under Section 80C?
Ans: SIPs in Equity Linked Savings Schemes (ELSS) and Unit Linked Insurance Plans (ULIPs) are eligible for tax benefits under Section 80C of the Income Tax Act, 1961.
Q3. What comes under Section 80C?
Ans: Section 80C covers various tax-saving investments such as ULIPs, PPF, EPF, ELSS, NSC, tax-saving fixed deposits, and pension schemes, allowing deductions of up to ₹1.5 lakh per financial year.
Q4. SIP comes under which section?
Ans: SIP investments in ELSS, ULIP, or other eligible tax-saving instruments qualify for deductions under Section 80C of the Income Tax Act.
