Is SIP Tax-Free? Understanding Taxation on SIPs

Did you know on average salaried Indians pay three times more of their income in the form of taxes to the government? How much tax you pay is determined not by your money earned but by your skills to reinvest it smartly. If a substantial amount of your income goes towards paying taxes yearly, it's time to revisit your investment plan. A SIP plan is one of the best tax-saving financial tools in the market. Mutual funds are a very versatile investment tool which offers options to build wealth based on your risk appetite. With a surprisingly low amount, you can choose a SIP to fight market volatility.But before we dive into the world of mutual funds, let's understand SIPs. Does SIP come under 80c, what are its tax benefits, and more? Also read: Which Type of SIP Mutual Fund to Start Investing in?

SIP, i.e., Systematic Investment Plan , allows regular investment of a fixed amount of money at predetermined intervals, typically monthly or quarterly, into a chosen mutual fund instead of making a Lump Sum Investment.When you apply for an SIP plan, the chosen amount is automatically debited from your linked back account and invested for the fixed time. For instance, you set aside one lakh to invest in mutual funds and choose to start and SIP with a monthly amount is ₹ 500. Each month till the predetermined time, ₹ 500 will be deducted and credited towards the plan you choose to invest in. On the other hand, you can also choose to make a one-time payment and leave the money to perform for the stipulated time. Also read: Lump Sum Investment Vs SIP

A mutual fund is an investment instrument, while a SIP is a route to invest in mutual funds. As the name implies, a mutual fund SIP enables you to invest regularly and systematically over a specified period. There are many benefits of investing through SIP. This disciplined approach to investing through SIPs offers the potential for long-term wealth accumulation and financial planning.However, like most financial tools, some assets of mutual funds are taxable. Read more about it here.

SIPs are tax-free. Under section 80C of the ITA, you can claim deductions up to INR 1.5 lakhs annually when you invest in a tax-saving mutual fund. Linked under the ELSS, Equity Linked Saving Schemes and SIP falls under the EEE category. The exempt, exempt, exempt category is an excellent way to claim returns and earn superior returns in the long run. Amount invested, money earned on maturity, and the total withdrawn amount are tax-free!SIPs help you save tax, but that's only one of its significant advantages. As a novice in the investment game, SIP instils financial discipline, which pushes you to achieve your financial goals. When you commit to investing a predetermined amount at fixed intervals, you cultivate a healthy saving habit. Also read: Is Premature Withdrawing In ELSS Allowed? What Are Your Options?

To reap SIP tax benefit rewards, start a SIP under ELSS. With exposure to equity and a lock-in period of 3 years, your money will grow while you save tax to build long-term wealth. An essential point to remember when investing in a SIP is to start early in the financial year to accumulate a sizeable deduction by the end. Planning allows you to maximise your benefits under 80C and magnify your returns over time. Also read: Monthly SIP vs Weekly SIP – Which One Should Consider?

Reduced tax obligations:

Claim up to ₹ 1.5 lakh deductions yearly from your taxable income when you invest an equivalent amount in ELSS.

Build long-term wealth:

Among the highest-performing 80C investments, ELSS mutual funds diversify money between equity and equity-related securities. Despite market risks, it is an excellent asset for building long-term wealth for individuals and business owners. If you run a small business, starting a SIP helps you build a reservoir of funds to manage expenses efficiently.

Liquidity:

Unlike other tax-saving investment options, ELSS offers maximum liquidity. A lock-in period of just three years to grow your wealth, whereas PPFs have a tenure of 15 years.

Flexibility:

SIP investments through ELSS allow investors the convenience to make fixed monthly/quarterly deposits to save tax. Also read: Reasons Why Best SIP Investment Plans Is Best Way To Invest

Calculating LTCG and STCG for an underlying SIP is based on the similar principals as equity or debt funds. However, you do not pay tax if the holding period for unit held is over a year. In case it is held for less than a year, a 15% tax is levied as short-term capital gain on your profits. Since SIPs are not a lumpsum investment, a First In First Out (FIFO) approach is used to calculate capital gains.When you invest in a non-equity fund, whether lumpsum or SIP, your tax gains are applicable based on the tax bracket you fall in. Gains from the investment get added to your income when the holding period is less than three years. In case it is more than three years or 36 months, you must pay capital gains at 20%. Also read: Why should you start SIP for your small business?

Here’s a hypothetical illustration of how an SIP would work if you started with a monthly investment of ₹ 10,000 in a diversified equity fund from January to April:

To conclude, choosing a SIP via the ELSS fund empowers investors to create a structured financial plan for the long run. However, before opting for any tax-saving fund, know your investment objective to make an informed decision. Also read: Factors to Choose Best SIP To Invest in for Maximum Return