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Can a Systematic Investment Plan provide tax benefits?

  • Highlights

  • Claim a deduction on SIPs under Section 80C

  • Invest in SIPs for at least 3 years to enjoy tax benefits

  • Pay tax on returns from SIPs backed by equity funds

  • Pay tax on debt funds based on tenor of investment

When you invest in an SIP you can earn significant returns. This isbeneficial as the returnsaregreater than the sum that youare likely to put aside regularly, for example in a savings account. Apart from enjoyingthe best SIP benefits such as starting an investment with just Rs.500, excellent liquidity and ease of management, you can also save on taxes. This way you can make the most of your investment and enhance your wealth to financefuture goals and expenses.

Under which section of the IT Act can you claim benefits?

You can claim a deduction on your SIPs under Section 80C of the Income Tax Act. However, if you are already claiming deductions using other investments under this section, you may be able to claim lesser tax deductionsusing your SIP.

This is because under this section, you can claim a total of Rs.1.5 lakh.

This means that even if you have 2 or 3 investments that allow you to claim Rs.1.5 lakh as a deduction, you can claim a total of this amount and not Rs.1.5 lakh for each investment. Here, another thing to remember is that to claim tax benefits for certain SIPs, such as ELSS-backed SIPs, you will also have to abide by a lock-in period of 3 years.

Equity funds

When you invest in equity funds, including funds backed by Equity-Linked Savings Scheme (ELSS),as per the Budget of 2018, you have to pay a long-term capital gains tax. The returns are no longer tax-free even if you hold the SIP for a period of 3 years.Long-term capital gains greater thanRs.1 lakh, as a result of redemption of mutual fund units, are taxed at 10%. So, if you have earned Rs.2.5 lakh in a financial year, your tax obligation will be calculated on Rs.1.5 lakh (Rs.2.5 lakh–Rs.1 lakh).

Debt funds

You can invest in both short-term andlong-term debt funds. With debt funds, you can expect your investments to grow at an averageSIP interest rate of 12%–15%. However, you earn capital gains that are taxable. The extent to which you have to pay tax depends on the duration for which you invest. If you are invested for less than 3 years, it is known as a short-term capital gain. This amount will be added to your total income and taxed as per the relevant tax bracket. Returns that you earn over a period that is greater than 3 years are known as long-term capital gains. These capital gains are taxed at the rate of 20% after indexation, or at the rate of 10% without indexation.

Understanding the tax liability associated with investing in SIPs will allow you to plan your investment better and understand your net gains too.

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