Systematic Investment Plans (SIPs) offer a compelling way to save on taxes while growing your wealth. By investing in Equity Linked Saving Schemes (ELSS) through SIPs, you can take advantage of Section 80(C) of the Income Tax Act, 1961. This allows you to deduct up to Rs. 1.5 lakh from your taxable income, potentially saving you significant tax depending on your tax bracket. For example, someone in the highest tax bracket (30%) could save around Rs. 45,000 per year through SIP investments in ELSS.
Beyond tax benefits, SIPs promote disciplined investing by automating your contributions. This helps you manage your monthly cash flow effectively and build a consistent investment habit.
Is SIP tax-free?
SIPs themselves are not tax-free, but they can be a powerful tax-saving tool. Here is why:
- SIPs are a way to invest in certain mutual funds, like Equity Linked Saving Schemes (ELSS).
- ELSS investments qualify for a tax deduction under Section 80C of up to Rs. 1.5 lakh annually, reducing your taxable income.
- This deduction translates to tax savings, depending on your tax bracket. For instance, someone in the highest bracket (30%) could save around Rs. 45,000 per year.
While the returns from your SIP investment might be taxed in the future, the initial investment enjoys a tax benefit.
What is tax-saving SIP?
Tax-saving SIPs offer a means to save taxes while investing, presenting one of the many advantages of SIP investments. Although not all SIPs are tax-free, they serve as effective tools for tax-saving purposes, yielding substantial returns on investments. Among the various investment options for tax-saving, Equity Linked Savings Scheme (ELSS) stands out as a popular choice. ELSS funds, characterised by a mandatory lock-in period of three years, are tax-saving equity funds. Investing in ELSS provides the dual advantage of wealth accumulation and tax savings, with a significant portion of the funds allocated to equity or equity-related instruments.
How SIPs can help you save tax
You can lose a substantial amount of your income in paying taxes which means you lose out on your savings. SIPs can be one of the best tax-saving instruments with high returns on your investments.
You can claim a deduction of up to Rs. 1.5 lakh from your taxable income for investing in ELSS through SIPs under Section 80(C) of The Income Tax Act, 1961. With the highest tax slab of 30%, you can save up to Rs. 45,000 in a year.
Along with inculcating a habit of disciplined investment and ensuring auto-investment management, early tax planning through systematic investment will also enable you to plan your monthly cash balance in a better way.
The SIP calculator helps you look at your total investment amount, total maturity amount and your income on your investment.
Get more from ELSS
Apart from being one of the best tax saving schemes, ELSS scores high on almost every parameter to ensure maximum returns on your investments. Moreover, they are transparent, with high liquidity and low charges, and give better returns than most otherinvestment tools.
When compared with other tax-saving investments like Public Provident Fund or a 5-year fixed deposit, ELSS promises higher returns along with a low lock-in period of three years. You can start a SIP in ELSS mutual funds as low as Rs. 500 per month.
SIP Tax Benefits
Effective tax planning is essential, and without it, one risks losing a significant portion of money to taxes. SIP falls under the EEE (Exempt, Exempt, Exempt) category for Equity Linked Saving Schemes (ELSS). The amount invested, the amount received at maturity, and the amount of the withdrawal are all tax-free. One may deduct up to Rs. 1,50,000 annually using SIP in an ELSS fund.
Start your tax planning early
The ideal way to start your tax planning is to begin in the month of April itself through a SIP in ELSS rather than waiting till the end of the financial year. It saves you from the bunch of frantic investments made at the end of the year to save taxes and accumulate your wealth with higher returns.
ELSS Mutual Funds are hence part of the growth asset class. The difference in returns, along with the power of compounding over the long-term results in a huge amount. So, start an SIP in tax-saving ELSS by providing an ECS mandate to deduct a fixed amount from your bank account every month toinvest in mutual funds.
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