What are SIP and Tax Benefits
Systematic Investment Plan or SIP is a way to invest small amounts at regular intervals in mutual funds. Equity Linked Savings Scheme (ELSS) is the only SIP option for mutual funds that qualifies for a tax deduction as permitted by Section 80C of the Income Tax Act, 1961.
What is ELSS?
It is goal-based and specifically for capital growth through investments in growth stocks, though as an equity mutual fund, ELSS (Equity Linked Savings Scheme) will also invest in debt and equity-linked instruments. It provides tax-saving benefits as well as the ability to earn higher returns from other 80C investments including PPF, NSC and Fixed Deposits.
ELSS Tax Benefits Under 80C
A Systematic Investment Plan (SIP) allows investors to invest small amounts regularly in mutual funds. Among various mutual funds, Equity Linked Savings Scheme (ELSS) is the only SIP option eligible for tax deductions under Section 80C of the Income Tax Act, 1961.
Why Choose ELSS SIP?
An ELSS SIP contributes to average out the purchase price over time and thus reduces the impact of market volatility. Compared to a lump sum investment, investing in an ELSS through SIP is less risky and provides gradual wealth accumulation.
How to Start Investing in ELSS via SIP?
Select a reputed mutual fund provider.
Complete KYC verification using PAN and Aadhaar.
Choose ELSS fund with good past performance.
Set a monthly SIP amount and link a bank account.
Start investing and track returns regularly.
Key Features of ELSS SIP
- Tax Benefit: Investments made up to ₹1.5 lakh in a financial year are allowed as a deduction under 80C.
- Lock-in Period: Three years, the shortest among 80C investment options.
- Market Returns: Potentially higher returns compared to other tax-saving instruments.
- Investment Flexibility: Starts from as low as ₹500 per month through SIP.
Comparison of ELSS With Other 80C Investments
| Investment Option | Lock-in Period | Expected Returns | Taxability on Returns |
|---|---|---|---|
| ELSS Funds | 3 years | 12-18% (market-linked) | LTCG over ₹1 lakh taxed at 10% |
| PPF | 15 years | 7-8% | Fully Tax-Free |
| NSC | 5 years | 7-8% | Interest is taxable |
| FD (5 Years) | 5 years | 5-6% | Interest is taxable |
Why Choose ELSS SIP?
ELSS SIP helps investors mitigate market fluctuations by averaging the purchase price over time. Compared to lump sum investment, SIP in ELSS reduces risk and builds wealth steadily.
READ MORE: How Much Gold Can You Keep at Home as Per Income Tax Rules?
How to Start Investing in ELSS via SIP?
- Select a reputed mutual fund provider.
- Complete KYC verification using PAN and Aadhaar.
- Choose ELSS fund with good past performance.
- Set a monthly SIP amount and link a bank account.
- Start investing and track returns regularly.
FAQs on ELSS SIP and 80C
1.Which SIP is tax-free under 80C?
Only ELSS SIPs are eligible for tax benefits under Section 80C. Investments up to ₹1.5 lakh in a financial year are allowed as deductions, but returns exceeding ₹1 lakh are liable to be taxed at 10% LTCG.
2.What is the lock-in period for ELSS SIP?
ELSS funds have a lock-in period of 3 years. If the investment is made through SIP, then each installment gets locked-in for three years from the date of investment.
3.Can I withdraw ELSS SIP before 3 years?
No, investments in ELSS are locked for a period of three years. There is no provision for partial withdrawal before that.
4.How much tax can I save with ELSS SIP?
Investing ₹1.5 lakh in a year enables you to save as much as ₹46,800 in taxes if you are in the highest tax bracket which is 30%.
5.Is ELSS SIP better than FD for tax saving?
Yes, the expected returns from ELSS are much higher (12-18%) compared to FDs that offer only 5-6% returns. However, the returns from ELSS are market-linked, whereas FDs offer fixed returns.
6.Can I invest more than ₹1.5 lakh in an ELSS SIP?
Yes, but the tax benefit in that case is capped at ₹1.5 lakh under 80C. Any additional investment will not give any further tax deductions but will keep generating returns.
An ELSS investment through a SIP is the best way to achieve tax savings and wealth creation. One should always check the performance of the fund before investing.
