Tax Saving with a SIP
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Tax Saving with a SIP

Tax Saving SIP: A perfect haven to save tax

Demonetization was hailed by most financial pundits as the first step to digital investments. Since the beginning of 2017, the Government of India has created road maps to increase investor confidence in Digital Assets. Financial Market products like Systematic Investment Plans (SIP), and ELSS (Equity Linked Savings Scheme) are in focus. Since then, Open Banking and Fintech (financial technology that allows investors to handle their portfolios digitally) have also gained a lot of popularity.

ELSS: the best tax saving SIP

SIP is the abbreviation for Systematic Investment Plans. The concept of SIP can be related to any form of investments. As the very name suggests, an investor would choose an investment opportunity which will grow over time with recurring capital accumulation. These investments will be made in regular periodic intervals like monthly, quarterly, or semi-annually basis.

To make SIP investments more lucrative, the Government of India has also declared tax relief for investments in ELSS under section 80C of the Income Tax Act.

Linking a systematic investment plan with an Equity Linked Savings Scheme (ELSS) can do wonders for an investor.

When Does an ELSS Investment Qualify for Tax Savings

For an ELSS to be eligible for tax exemptions, it has to comply with some rules laid down by the Securities Exchange Board of India (SEBI). The guidelines state that

  • The fund invests primarily in Equity Securities. In other words, any mutual funds investing in other financial instruments do not qualify for tax exemptions.
  • The ELSS will have a minimum lock-in period of 3 years. The lock-in period starts from the first day of investment.
  • Units purchased/invested can be redeemed only after the minimum lock-in period of 3 years. The investor may also choose to continue the SIP for more than 3 years.

Essentials of an Efficient Tax Saving SIP?

Some of the pre-requisites of an efficient SIP are:

  • The amount of investment and periodic intervals are decided at the start of the investments. Once finalized, it continues for the entire duration of the SIP.
  • The investor benefits from market volatility, since the periodic investment amount is pre-decided. In an event, during the market is on a bull run; the investor will derive higher value from the investments.
  • On the other hand, the market is bearish, the investor will benefit by getting more number of units in the fund. The benefit thus derived is commonly referred to as ‘Rupee Cost of Averaging’.
  • SIP is efficient only when it is in sync with the investors financial goals. A perfectly aligned SIP can add value to investor wealth and can be instrumental in generating wealth.
  • SIP investments safeguard investors at times of market volatility.

How Does Sip Investment Help with Tax Savings

As per section 80C of the Income Tax Act, ‘investments in equity-linked saving scheme mutual funds is eligible for a tax deduction to the tune of INR 1,50,000’. In simple words, at the time of calculating your tax incidence, you can reduce the principal investments in ELSS Funds from your taxable income. The reduction in taxable income will result in a reduced overall tax impact.

For example - If an investor with a taxable income of INR10,00,000 invests INR1,50,000 in ELSS Funds. After adjusting the tax-saving effect, the net taxable income will be INR 8,50,000. In turn, this will reduce the net tax payable amount for that assessment year.