There are numerous SIP tax benefits. Choosing the right investment channel is the key to financial security. While there are a number of options to choose from, investing in the best tax saving SIP (Systematic Investment Plan) can be one of the best options. SIPs help you to invest a fixed amount in mutual funds in a systematic way, thereby averaging out your cost of financing and allowing you to benefit from the power of compounding.
What are Tax Saving SIP Mutual Funds?
Mutual funds have become one of the most favoured investment tools due to a bunch of factors. The most critical of these factors is that they offer better returns than other traditional investment avenues. Since there are numerous SIP tax benefits, people are now opting for the SIP more and more.
Mutual funds collect money from different investors and invest it in a balanced portfolio of debt securities and equity instruments. The funds also provide a variety of investment options, such as open or closed-ended schemes, specialty funds, or a mix of all of these. Investors can select any fund based on their investment objectives and risk tolerance.
Tax-saving mutual funds operate in the same way as other mutual funds but with the extra benefit of SIP investments. The unique characteristic of these mutual funds is that investments in tax-saving mutual funds are tax-deductible under Section 80C of the Indian Income Tax Act. The majority of tax-saving mutual funds are ELSS plans that participate in the growth-oriented equities market.
How Do Tax Saving SIP Mutual Funds Work?
A Systematic Investment Plan (SIP) allows you to invest in mutual funds without paying a lumpsum amount. You do not have to invest a large amount of money in starting your mutual fund investment through SIP under 80c. If you invest via SIP, you have to set aside a sum at regular intervals, which can help you save a corpus in the long run.
Every time you invest in a mutual fund scheme through SIP, you buy a certain number of fund units corresponding to the amount you invested. You do not need to study the markets when investing through the best tax saving SIP as you benefit from different market trends.
Purchasing of units is totally dependent on market conditions. When the market is down, you can purchase more fund units, and if the market rate is higher, you can buy lesser units. As the NAV of all mutual funds is updated on a daily basis, the cost of purchase may vary from one tax saving SIP to another. Now that you know everything about tax on SIP, let’s find out about types of ELSS.
Types of Equity-Linked Saving Schemes (ELSS)
Equity Linked Savings Scheme (ELSS) is an open-ended Equity Mutual Fund that helps you save and provide an opportunity to grow money. ELSS offers tax benefits; that is why it is also known as a tax-saving mutual fund scheme. By investing in ELSS, you can save up to INR 150,000 as per Section 80C of the Income Tax Act.
Tax savings benefit is the main reason to invest in the ELSS funds. All the tax deduction on the investment is applicable under Section 80C of the Income Tax Act 1961.
It also helps to build a habit of investing for a long time period. Some other mutual fund schemes come with long-term investments, although they are not bound by a fixed lock-in period. On the other hand, you need to invest for a minimum of 3 years with ELSS mutual funds.
With the more extended investment option, you can to grow your fund and redeem the benefits after three years. Since ELSS funds invest the money in equities, you can earn higher returns.
ELSS funds allow you to invest in the stock market too.
An investor can pick from three types of ELSS mutual funds:
Growth Option
Under this option, the investor earns a profit only at the time of redemption. Profits are multiplied by an increase in the entire NAV of the ELSS mutual fund. Dividend payments are not available to investors.
Dividend Option
The dividend option entitles the investor to receive dividends on schedule. Dividends are declared only when earnings are excessive. Dividends are taxed in the hands of investors, according to the 2020 budget. Dividend tax on SIP are paid by investors based on their income tax bracket.
Dividend Reinvestment Option
This option allows the investor to reinvest dividends earned into the same plan. This strategy is advantageous when markets are performing well and are expected to continue doing so.
Also Read: Best Performing Mutual Funds in India
Features of a Tax Saving SIP Mutual Funds
As mentioned, there are a lot of SIP tax benefits that you will get once you buy a preferred SIP plan. Here are the top features of best tax saving SIP-
Tax Advantages
The main feature of ELSS Tax-Saving SIPs is that it is the only equity investment that qualifies for Section 80 C tax deductions of up to INR 150,000. As a taxpayer in the highest tax bracket, you may save around INR 46,800 by investing a maximum of 150,000 per year in various SIPs.
Lock-In
ELSS is the best Tax Saving SIPs and is not only tax-efficient but also has the shortest lock-in period of any 80C investment. While the minimum lock-in durations for other 80 C tax-saving investments range from 5 to 15 years or more, the lock-in term for an ELSS SIP is just 3 years.
Returns
ELSS SIPs generate much greater returns than other 80 C plans. More than 65 percent of money are allocated to equity assets by fund managers. As a result, you should expect better long-term returns, ranging from 10% to 18%, as compared to other Mutual Fund and 80C investments.
Investment
Investment Tax-saving SIPs have a minimum investment value of INR 100, however this might vary from Fund House to Fund House. Furthermore, you may select from a wide range of ELSS tax-saving SIPs to diversify your investment and maximise tax on SIP benefits.
Benefits of Investing in Tax Saving SIP
SIP investment provides many benefits to investors. By investing in a systematic investment plan, an individual can get a significant return by investing a small amount regularly. Here are the benefits of investing in tax saving SIP.
Convenient Mode Of Investment
Using tax saving SIP, an individual can invest in a disciplined and phased manner. It is the most convenient and hassle-free mode of investment. Investors can start investing in SIP with a minimum amount of INR 500. Also, an investor can authorize a mandate from the bank to pay for the SIP investment every month automatically.
Cost Averaging
The investors do not have to time the market. They can buy more units when the market rate performing risk is low and buy fewer units when the market rate performing risk is high. This can reduce the overall investment cost.
Tax Benefits
SIP is one of the best tax-saving instruments which provides high returns on investments. An investor can claim a deduction of up to INR 150,000 from the taxable income for investing in SIP under 80C of The Income Tax Act, 1961. Furthermore, tax saving SIP comes under 80C; you can save up to INR 45,000 in a year, with the highest tax on SIP slab of 30%.
To ensure auto-investment management, early tax on SIP planning will also enable you to plan your monthly cash balance better.
Benefit Of Compounding
The best way to accumulate wealth is to invest regularly. If you regularly invest a small amount, you can ultimately get double your investment over a long-term period. The benefit of compounding interest makes sure that you get profitable returns as compared to a one-time investment.
Tax Saving Mutual Funds ELSS vs PPF vs FD
Tax Saving Mutual Funds vs FD
| Parameter | Fixed Deposits | Mutual Funds |
| Returns | Guaranteed returns at a predetermined rate over a specific time | Returns are linked to the markets and the securities they invest in |
| Risks | Low-risk instruments as returns are pre-determined | Medium-to-high risk as these investments are subject to market volatility. |
| Expenses | No charges involved during initiation or the tenure of the deposit | Associated with certain expenses/charges w.r.t fund management, etc. |
| Withdrawals | Have a fixed lock-in period. Depositors seeking to withdraw their FD investments prematurely would have to pay the penalty for the same | After a set period, investors are able to withdraw their mutual fund investments. Exit load costs are imposed on withdrawals made before the specified time. |
| Taxation | Interest taxed based on income slab | LTCG tax of 10% if the total LTCG from equity-oriented mutual funds/ equity shares exceeds ₹1,00,000 in a year, and STCG tax of 15%, is levied on equity-oriented mutual funds. LTCG tax on debt funds is at 20% after indexation, while STCG tax is based on the investor’s income tax slab Tax rate increases by applicable surcharge and education cess of 4% |
| Investment Mode | Investors can only opt for lumpsum investment | Investors can either invest via SIP (Systematic Investment Plan) or lumpsum mode |
| Impact of Inflation | Returns are unaffected by inflation since interest rates are pre-determined | Returns on mutual funds are inflation-adjusted. This enhances the probability of generating reasonable returns |
Tax Saving Mutual Funds vs PPF
| Parameter | PPF | Mutual Funds |
| Risk | Public Provident Fund PPF investment is low risk because it is backed by the Government of India. | ELSS funds invest in equity and equity-related instruments and are exposed to market risks. This makes them an ideal option for those who are willing to risk volatility for long-term gains. |
| Returns | The rate of interest on PPF investment is decided by the Government of India with the present rate being 7.9%. | The returns on ELSS depend on market movements. The 3-year annualized historical returns on ELSS funds are 12% and above |
| Tax Deductions | Returns are totally tax-free. | In ELSS, gains of over INR 1 Lakh are considered long-term capital gains and are, therefore, taxed at the rate of 10%. |
| Lock-In Period | PPF investment has a lock-in period of 15 years, with an option to make a partial withdrawal after the completion of 5 years. | Equity-linked saving schemes ELSS, carries a lock-in period of only 3 years. |
| Volatility | No volatility | ELSS funds are invested in equity and are subject to market fluctuations and volatility. |
Word to Remember
Section 80C
An investor can get the benefit of a SIP deduction under income tax on SIP due to Section 80C of the Income Tax Act 1961. Investing in equity-linked savings scheme (ELSS) through SIP enables you to claim a tax deduction of INR 150,000 from your taxable income. The investors whose income falls in the higher tax slab with SIP in ELSS, they can save around INR 45,000 per year as SIP comes under 80C.
Top 10 Tax Saving SIP Mutual Funds in India
| Funds | 1-Year Returns (%) | 3-Year Returns | 5-Year Returns |
| IDFC Tax Advantage (ELSS) Fund Growth | 23.1 | 11.7 | 22.3 |
| Tata India Tax Savings Fund Growth | 14.6 | 12.3 | |
| L&T Tax Advantage Fund Growth | 16.2 | 13 | 20.3 |
| Aditya Birla Sun Life Tax Relief 96 Fund Growth | 19.3 | 12.1 | 23.5 |
| Aditya Birla Sun Life Tax Plan Growth | 18.9 | 11.6 | 22.6 |
| DSP BlackRock Tax Saver Fund Growth | 9 | 11.4 | 21 |
| Axis Long Term Equity Fund Growth | 18.1 | 9.3 | 24 |
| Kotak Tax Saver Fund Growth | -4.79 | 10.25 | 17.66 |
| Invesco India Tax Plan Fund Growth | 0.6 | 11.1 | 19 |
| HDFC TaxSaver Fund | -11.1 | 8.5 | 15 |
Conclusion
Before investing in a tax-saving SIP scheme, you must be aware of the best scheme available in the market. You can easily choose the best tax saving SIP which is suitable for you and which can meet your financial goals. Also, by assessing the basic details of all schemes, you can decide what type of scheme you want to choose
It Is always better to start your investment as early as possible so that you do not have to wait for the end of the financial year and get all the tax benefits of SIP investment it provides.
Also Read: Tax Saver Mutual Funds
FAQs About Tax Saving Mutual Funds
A systematic Investment Plan (SIP) allows you to invest a fixed amount in a mutual fund scheme periodically. SIP is an innovative, hassle-free mode of investment where you are allowed to contribute a pre-determined sum of money on a weekly or quarterly basis.
Investing in SIP mutual fund is a straightforward and hassle-free process. When applying for tax-saving SIP plans, you have to pay a premium at a stipulated interval. After that, your money is automatically invested in the mutual funds you have purchased. Based on the net asset value of your fund, you are allocated a certain number of units at the end of the day.
SIP comes under Section 80C of the Income Tax Act, 1961.
SIP provides a disciplined approach toward investment in Mutual Funds. SIP is a good option for investment as it not only offers high returns on investment but also helps the investors to create wealth over a long period of time.
You can choose the online and offline methods to start an SIP investment. For the offline process, you will have to visit the AMC office. You will require to provide documents like address proof, ID proof, etc. For the online method, you can see the website of SIP provider and enter all details required.
