How to Make SIP Investment Under 80C?

A systematic Investment Plan (SIP) is an investment tool that helps achieve your financial planning goals. However, one of the most common questions that arise in the minds of investors is “is SIP tax-free?”. SIP plans offer individual investors the freedom to choose a comfortable amount and a convenient time to invest their money along with SIP tax benefits.

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Let us understand in detail tax-saving options under Section 80C and how the SIP method benefits the investor in terms of tax-saving.

Tax Saving Options Available Under Section 80C

As an Indian, it is your legal obligation to pay taxes on your income as per the designated limits. However, this does not mean that there are no legal ways to save tax. To help taxpayers save tax and simultaneously contribute towards the nation, the government offers deductions under Section 80C of the Income Tax Act. With this route, one can reduce their tax liability every year. Some of the common tax saving options under section 80C include:

  • Equity Linked Saving Scheme (ELSS)

  • Public Provident Fund (PPF)

  • National Pension Scheme (NPS)

  • Unit Linked Insurance Plan (ULIP)

  • Employee Provident Fund (EPF)

  • Sukanya Samriddhi Yojana (SSY)

  • National Savings Certificate (NSC)

  • Fixed Deposit (FD)

One can claim a deduction of Rs. 1,50,000 every year, collectively, by investing in the above instruments.

SIP and Benefits

Since we have highlighted the areas of avenues for investments under section 80C, now let us understand SIP tax benefits. A systematic Investment Plan, more commonly known as SIP, is an investment method that lets you to invest a small amount in your preferred mutual fund scheme at regular intervals. When you opt for SIP, a fixed amount is deducted every month, fortnightly, or at any preferred interval from your bank account to get invested in the desired fund scheme. Some of the benefits of SIP include:

  • Convenience - Start investing in mutual funds SIP with an amount as low as Rs. 100.

  • Rupee-Cost Averaging - No need to time the stock market. You buy more units when the market is on rise, i.e., when NAV is low and vice versa.

  • Power of Compounding - Early long-term investments can help you magnify your returns over a period of time.

  • Disciplined investing - Embrace disciplined, long-term investment ideology for financial growth and stability.

SIP Tax Benefit

Efficient tax planning is highly crucial, and in absence of that, one can lose a substantial amount of income through taxes. SIP under Equity Linked Saving Schemes (ELSS) comes under the EEE (Exempt, Exempt, Exempt) category. This means, the amount invested, the amount on maturity and the withdrawal amount all are tax-free. With SIP in ELSS fund, one can claim a deduction of up to Rs. 1,50,000 per year.

Invest & Save upto ₹46,800 per annum in taxInvest & Save upto ₹46,800 per annum in tax

Capital Gains Tax on SIP

For calculating the capital gain tax on SIP, there are a few aspects that are considered - the type of underlying fund on which SIP is done and the period for which the fund has been held. Thus, equity and debt funds will have a difference in capital gain tax calculation. Here are the highlights of how SIPs will be taxed.

  • SIPs made in equity funds (except ELSS) when held for more than 1-year, Long Term Capital Gain (LTCG) tax is applicable. If held for less than 1-year, Short Term Capital Gain (STCG) tax is applicable.

  • SIPs made debt and other category funds, when held for more than 3 years, Long Term Capital Gain (LTCG) tax is applicable. If held for less than 3 years, Short Term Capital Gain (STCG) tax is applicable.

It is to be noted that for SIPs, the funds held from the date of each purchase tranche individually are considered.

SIP in ELSS Funds

For acquainting the small investor with a disciplined way of investing in the stock market, with a minimum level of risks, and also offering tax benefits, ELSS was introduced. Thus, the SIP in ELSS are different in their treatment than other mutual fund products. ELSS is a tax saving fund which provides SIP tax benefits under section 80C, with a mandatory lock-in period of 3 years.

For all the SIP investments made in ELSS fund for a particular financial year, are eligible for deductions under section 80C. The important point to remember here is that each SIP of ELSS will have a lock-in period of 3 years from the date of purchase. So, a SIP deducted in April 2022 will have a lock-in till April 2025 and the SIP deducted in May 2022 will have a lock-in till May 2025 and so on.

One of the prominent advantages of ELSS funds is that they have the shortest lock-in period amongst the other tax savings options under section 80. Also, one can start a SIP in an ELSS mutual fund with a low investment amount of Rs. 500.

ULIP v/s ELSS SIP: Which Provides Better Tax Advantage?

Investments in both, ELSS and ULIPS (Unit Linked Insurance Plans) offer benefits like investment in the stock market. Apart from the fact, the ELSS is a mutual fund product and ULIP, is an insurance offering, there are a few differences between the two, especially in terms of tax on SIP and ULIPs.

Both ELSS SIP and ULIP offer tax benefits under section 80C. In ULIP, the amount from any insurer can give you a deduction. Whereas, ELSS SIP come under EEE (Exempt, Exempt, Exempt) category. Also, the lock-in period for SIP is 3 years and that of ULIP is 5 years, making SIP more liquid.

Conclusion

Planning SIP in ELSS not only helps you to benefit from your financial year tax deadline but also a decent return on investments. So, SIP in ELSS mutual fund turns out to be a good tax-saving avenue within a brief lock-in period having the potential of reasonable returns.

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