How to do Tax-free SIP?

Tax-saving SIPs can help you to compound your savings and to fulfill your financial goals. Several Investment schemes allow you to grow your money to fulfill your future goals as well as offer tax exemptions. Let’s look at the ways through which you can have Tax-saving SIPs.

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SIP Benefits
Start SIP with as low as ₹1000
Start SIP with as low as ₹1000
No hidden charges
No hidden charges
Save upto ₹46,800 in Tax
Save upto ₹46,800 in Taxunder section 80 C
Zero LTCG Tax
Zero LTCG Tax^ (Unlike 10% in Mutual Funds)
Disciplined & worry-free investing
Disciplined & worry-free investing

What is a Systematic Investment Plan?

A systematic Investment Plan commonly known as SIP is a method of investing your money in different investment schemes. One needs to invest a fixed amount over regular intervals such as monthly, quarterly, semi-annually, or yearly. 

Rather than investing your money in a lump-sum manner, you can choose to invest through SIP and the amount of money can be as low as Rs. 500 depending upon the nature of the scheme.

Benefits of SIPs

  1. Power of Compounding

    As opposed to lump sum payment, SIP investment is a disciplined way of investing your money which ensures that your investments are on constant growth. Due to your initial investment and the compounded returns over time, the money you invest over time increases to a large corpus.

  2. Low Initial Investment

    As said earlier, one can start investing in their choice of funds through SIP with the amount as little as Rs. 500. This is one of the affordable investing methods that ensures offer you higher returns. It is suggested to explore best SIP plans list before taking investment decision.

  3. Rupee Cost Averaging

    While investing through SIP, one can avail of the benefit of rupee cost averaging. Rupee cost averaging allows you to benefit from market volatility with SIP since your investment amount is consistent over a longer period. The value of each unit is averaged out by the fixed amount you contribute via SIP. To minimize your average cost per unit, you can buy more units when the market is low and fewer units when it is high.

What is Tax-Saving SIP?

Saving taxes on your investment is one of the many benefits of investing through SIP. However, are all SIP tax-free?

Well, SIPs are one of the best tax-saving tools that come with high returns on your investments.

Take a look below to explore some of the investment options for tax saving:

One of the most common tax-saving investment schemes through SIP is ELSS. Equity Linked Savings Scheme or ELSS Funds are tax-saving equity funds that come with a mandatory lock-in period of three years. Investing your money in ELSS offers the dual benefit of wealth accumulation and tax savings. These funds invest their major portion into equity or equity-related instruments.

Another investment option by which you can save taxes is Unit-Linked Insurance Plans (ULIPS). ULIP is a combination of investment and insurance. One part of the premium paid by the policyholder is used to provide a life insurance cover and the remaining sum is invested. With ULIPs the insured can avail of life insurance coverage as well as tax benefits on the investment returns and premium paid towards the policy under sections 80C and 10(10D) of the Income Tax Act 1961.

Other than these two, the individual also has several other investment options wherein one can save taxes such as Sukanya Samriddhi Yojana, National Pension System (NPS), Senior Citizen Saving Scheme (SCSS), Fixed Deposits & Recurring Deposits.

In order to calculate the benefit amount, SIP calculator is a useful online tool. 

What are the SIP Tax Benefits?

Below-mentioned is the SIP Tax benefits one can avail by investing in different investment schemes:

  1. Tax Benefits from investing in ELSS

    By investing in ELSS through SIP, one can save up to Rs1.5 lakhs a year in taxes under Section 80C of the Income Tax Act, 1961. 

  2. Tax Benefit from Investing in ULIPs

    The premiums paid for ULIPs are eligible for a tax deduction under Section 80C up to a maximum of Rs 1.5 lakhs. 

ELSS vs ULIP: A comparison

Parameters ULIP (Unit Linked Insurance Plan) ELSS (Equity Linked Savings Scheme)
Lock-in period Comes with a mandatory lock-in of 5 years Comes with a mandatory lock-in of 3 years
Tax Benefits Tax deduction under Section 80C is available Long Term Capital Gains above Rs. 1 Lakhs are taxed @ 10% 
Returns  The returns vary as the investment is made with any combination of equity, or debts An approximate return of 12-14% can be expected
Liquidity Funds can be partially withdrawn after the lock-in of 5 years  Funds will be available after the lock-in of 3 years.

Wrapping it up:

Choosing the right investment channel not only ensures that you grow your money but also makes sure that you do not loase your profits in taxes. Investing through SIPs offer high returns on your investments and can even claim a deduction of up to Rs. 1.5 lakh under Section 80(C) of The Income Tax Act, 1961.

FAQ's

  • Are there any risks involved with investing in SIP?

    SIP is one of the methods of investment wherein its risk depends on the investment option chosen, the risk involved, and other factors related to the investment option.
  • Am I eligible to avail of SIP tax benefits if I invest more than Rs. 2 Lakhs?

    As per Section 80 C under Income Tax Act, one can avail of tax deductions up to Rs. 1.5 Lakhs only.
  • What is the maximum number of investments one can own to save taxes?

    There is no restriction on how many investment products an individual may purchase for tax savings. However, one should keep in mind that there is a maximum deduction amount within which one may claim the tax benefits.

+For Mutual Fund midcap category Returns https://www.morningstar.in/tools/mutual-fund-category-performance.aspx & for Insurance midcap fund category Returns- https://www.morningstar.in/tools/insurance-fund-category-performance.aspx
*Past 10 Year annualised returns as on 01-12-2023
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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*under 10(10D)
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