SIP Investment Tax Benefits and How to Start Tax Saving SIP

Discover how Tax Saving SIPs as one of the best investment instruments, offering high returns while minimizing your tax liabilities.
Save Tax with SIP
3 mins
04 Feb 2024

Financial stability is a crucial factor in the fulfillment of your aspirations. Whether you desire for a bigger house, quality higher education for your children, a lavish lifestyle, or a comfortable retirement, you need money to acquire it. Adequate financial planning and proper investment of your hard-earned money can compound your savings to fulfill your dreams.

The key is to choose the right investment channel to ensure that your money grows well and avoid undue risks. Choosing the right investment vehicle also becomes essential so that you don't lose your gains in taxes.

Investing in tax savings schemes offered by mutual funds called Equity Linked Savings Scheme (ELSS) through a systematic investment plan (SIP) can be the ladder to your financial success.

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 other investment 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 to invest in mutual funds.

Calculate your EMI through Income Tax Calculator. Bajaj Finserv brings you pre-approved offers for personal loans, home loan, business loans and a host of other financial products. Not only does this simplify the process of availing of financing, but it also helps you save on time.

Who Should Invest in Tax Saving Funds Through SIP

Consider investing in the best tax saving SIPs if you have the following investment goals:

  • You are an individual or HUF looking to enjoy tax-saving benefits.
  • You have a long-term investment horizon of three years or more.
  • You prefer investing in equity instruments.

Top reasons why you should invest in tax saving mutual fund SIPs

Investing in tax saving mutual fund systematic investment plans (SIPs) offers a strategic approach to wealth creation while providing tax benefits. Firstly, it enables systematic investment, ensuring financial discipline. Secondly, tax saving mutual fund SIPs allow investors to benefit from the power of compounding, enhancing wealth over time. Additionally, they provide tax deductions under Section 80C of the Income Tax Act, making them a lucrative option for tax planning. Furthermore, these SIPs offer flexibility in terms of investment amounts and tenures, catering to diverse financial goals.

Capital gains tax on SIP

When assessing the capital gains tax on SIP, several factors come into play, including the nature of the underlying fund and the duration of the investment. Equity and debt funds are subject to different capital gains tax calculations. For SIPs invested in equity funds, excluding ELSS, held for over a year, Long Term Capital Gain (LTCG) tax is imposed, while those held for less than a year incur Short Term Capital Gain (STCG) tax. Conversely, SIPs invested in debt and other category funds, when held for more than three years, are subject to Long Term Capital Gain (LTCG) tax, and if held for less than three years, Short Term Capital Gain (STCG) tax applies. It's important to note that for SIPs, each purchase tranche is considered individually for tax assessment purposes.

How to start an SIP on the Bajaj Finserv platform to save tax on your income

Initiating a Systematic Investment Plan (SIP) on the Bajaj Finserv platform for tax-saving purposes is a straightforward process. Firstly, log in to the Bajaj Finserv website or app and navigate to the Mutual Funds section. Next, select the Tax Saving Mutual Fund that aligns with your financial goals. Then, input the desired SIP amount and choose the frequency of your SIP. Once these details are entered, proceed to complete the KYC process if not done previously. Finally, authorise your bank to debit the SIP amount at regular intervals. Starting an SIP on the Bajaj Finserv platform not only facilitates tax savings but also offers a seamless and user-friendly investment experience.

Conclusion

In conclusion, Tax Saving SIPs are a smart financial choice for investors seeking high returns while reducing their tax liabilities. These instruments offer a wide range of benefits, including the potential for long-term wealth creation, low investment thresholds, and the added benefit of tax-saving under Section 80C of the Income Tax Act. By investing in Tax Saving SIPs, investors can take advantage of opportunities to grow their wealth while minimising their tax burdens - making it an ideal investment avenue for new and seasoned investors alike. With the right investment strategy and careful planning, Tax Saving SIPs can provide a secure and lucrative investment option for financial goals ranging from short-term savings to long-term investment plans.

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Frequently Asked Questions

Which SIP can save tax?

Tax-saving SIPs are Equity Linked Saving Schemes (ELSS) that offer tax benefits under Section 80C of the Income Tax Act.

Is tax saving SIP good?

Tax-saving SIPs can be a beneficial investment for tax planning if aligned with your financial goals and risk tolerance.

Which is better SIP or ELSS?

ELSS (Equity Linked Saving Scheme) and SIP (Systematic Investment Plan) serve different purposes. ELSS is a tax-saving mutual fund, while SIP is an investment method used in various types of mutual funds, including ELSS.

Is SIP returns tax-free?

SIP returns are not entirely tax-free; they may be subject to capital gains tax, depending on the holding period and the type of mutual fund.

What is ELSS SIP?

ELSS SIP is a type of Systematic Investment Plan that invests the money in Equity Linked Saving Schemes. ELSS investments come with a lock-in period of three years, and investors can claim tax deductions under Section 80C of the Income Tax Act.

Which SIP is tax-free under 80C?

Equity-Linked Saving Scheme (ELSS) SIPs are eligible for tax savings under Section 80C of the Income Tax Act. An investor can claim a tax deduction up to Rs. 1.5 lakhs by investing in an ELSS SIP.

Which type of SIP gives the highest return?

The type of SIP that gives the highest returns depends on the market and economic conditions. Equity mutual funds have the potential to provide the highest returns in the long term, but they also have higher market risks than other investments. Debt mutual funds, on the other hand, offer lower returns but are comparatively safer.

Is the monthly SIP tax-free?

Taxes are levied on the redemption of mutual fund investments rather than on the investment mode itself. Capital gains from mutual funds are categorized as either short-term or long-term, and the applicable taxes are assessed accordingly. Equity Linked Savings Schemes (ELSS) offer tax-free capital gains on up to Rs. 1.50,000 invested in them.

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