What Investment Provides SIP Tax Benefit?
SIP or Systematic Investment Plan is a kind of mutual fund scheme which lets an investor systematically invest his or her money. This systematic investment plan continuously pours in small amounts in investment plans so that there is no burden of making bulk investments in one go involving a lot of money.
SIP is a very beneficial method of investing in mutual funds as it provides multiple benefits over time. These benefits are:
- Cost averaging across along tenure
- The power to compound investment payout
- And most importantly, it has a modest premium value.
This low premium value later accumulates and gets compounded so as to generate significant value at maturity.
Now there are indeed multiple ways of getting SIP tax benefits. But the most popular of these is the ELSS or the Equity linked saving scheme.
ELSS or Equity Linked Savings Scheme is a kind of diversified mutual fund that invests in the equity scheme with the minimum number of lock-in period amongst all the mutual fund based investment instruments, with a lock-in period lasting a mere three years. In case of ELSS, as mentioned before, a majority of the funds get invested in the equity. ELSS performs very well in case of the money staying invested for longer tenures.
Amongst all the other tax saving investments under the Income Tax Section 80 C like that of PPF or NPS, ELSS has the minimum lock in period.
Empirical data suggests that in case of ELSS longer tenures of investments generate compounded wealth over time by beating market lows and gaining through market highs.
Investments of a limit upto Rs 1.5 Lac per fiscal year in the ELSS funds will earn tax rebates under Section 80C, as accorded by the 2018 budget. The returns that are generated on these investments will also be tax-free at the time of the payout at the completion of the three years long lock-in period. Since this is a SIP investment, redemptions may happen on a first-in-first-out basis, because each of the individual SIPs has a lock-in period of three years.
As compared to other mutual fund instruments that invest in the equity sector, the risks are moderate. Due to the possibility of early liquidity, if returns are lower than expected, there is no mandatory commitment on part of the investor for not moving the funds to another mutual fund with higher returns. Also because of the longer tenures, the market lows get balanced against the market highs, and despite getting taxed over the Rs. 1.5 Lac limit, this works better than other tax saving investments.
Combination with other tax saving investments:
ELSS may be combined with government backed securities like the PPF to generate significant wealth creation across time.
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It is an effective tax saving solution, which helps to reduce the tax burden of the investor and also acts as an efficient investment instrument. These help grow your investments through the stock market and also diversify your investment portfolio.