Understanding SIP Investments and Tax Benefits Under Section 80C

A common question among investors is whether Systematic Investment Plans (SIPs) in mutual funds qualify for tax benefits. It’s not SIPs that offer tax benefits, but investments made in an equity-linked savings scheme or ELSS mutual fund – whether through SIPs or via lumpsum – that are eligible for tax benefits under Section 80C of the old income tax regime.

Table of contents

What is Section 80C?
What is tax-saving SIP?
SIP investments and section 80C: do mutual funds qualify for tax benefits?
How can you save taxes with mutual funds?
When should you start a SIP investment under 80C?

What is Section 80C?

Under the old regime, taxpayers can claim an annual deduction of up to Rs 1.5 lakh on their taxable income for certain investments and expenditures. A majority of these exemptions fall under Section 80C of the Income Tax Act. These include:

Equity linked savings schemes (ELSS)
Public provident fund (PPF)
National savings certificate (NSC)
Life insurance premiums
Home loan principal repayments
Tuition fees for children
Sukanya Samriddhi Yojana

The amount invested under Section 80C reduces the taxable income, thereby reducing the tax liability. The maximum deduction limit across all investments under Section 80C is Rs 1.5 lakh.

What is tax-saving SIP?

Tax-saving SIPs allow you to save on taxes while investing, offering a key benefit of SIP investments. Although not all SIPs are tax-free, they can help in tax-saving and may provide good returns. The Equity Linked Savings Scheme (ELSS) is a popular choice, offering wealth accumulation and tax benefits through equity investments.

SIP investments and section 80C: Do mutual funds qualify for tax benefits?

Investments made through SIPs in ELSS are eligible for Section 80C benefit. ELSS is a mutual fund that invests 80% of its portfolio in equity and equity-related instruments. It has a minimum lock-in period of three years.

However, SIP investments in other types of mutual funds like large cap funds, multi cap funds, debt funds etc. do not qualify for Section 80C benefits.

How can you save taxes with mutual funds?

ELSS investments are an effective way to save tax under Section 80C of the Income Tax Act. The lock-in period for such investments is relatively low (three years), which also makes them suitable for medium-term goal planning.

Here are a few steps to save tax through ELSS SIP investments under Section 80C:

1. Choose an ELSS scheme: Select a scheme from a reputed fund house. Evaluate past returns (if available), fund manager’s experience, expense ratio, portfolio holdings etc. before selecting the scheme. Do note that past performance may not sustain in the future.

2. Start an SIP: Initiate an SIP in the chosen scheme for the desired amount.

3. Invest before March: Make sure your SIP instalments are scheduled such that the total invested amount reaches Rs 1.5 lakh (across ELSS and other avenues, if any) before March 31 of the ongoing financial year.

4. Mention in tax returns: When filing income tax returns, mention the ELSS investment amount under Section 80C deductions to reduce taxable income.

When should you start a SIP investment under 80C?

Starting a SIP at the beginning of the financial year, ideally in April, can prevent last-minute tax-saving stress and spread investments evenly over the year, avoiding financial strain. Early SIP investments may accumulate substantial returns through compounding. Additionally, SIPs don’t require a huge sum, and an auto-debit feature promotes disciplined saving.

Conclusion

Section 80C of the Income Tax Act provides a deduction up to Rs. 1.5 lakh for investments in select schemes. These include Equity Linked Savings Schemes (ELSS), which are equity-oriented mutual funds. SIPs in ELSS mutual funds qualify for this tax benefit, while those in other mutual funds do not. A total of Rs 1.5 lakh is deducted from your taxable income for investments done under Section 80C, which can result in significant tax relief.

FAQs:

What is the lock-in period for ELSS investments?

ELSS investments have a lock-in period of 3 years. Investors cannot redeem their units before that.

How is ELSS different from other mutual funds?

ELSS provides tax benefit under Section 80C while other funds do not. ELSS also has the relatively short lock-in period of 3 years compared to other tax saving instruments like NSC, PPF etc.

Do I need to submit any proof for claiming SIP tax deduction?

Yes, you need to submit an account statement or investment certificate to show proof of investment and claim tax benefits under Section 80C.

Which SIP is tax-free under 80C?

Equity Linked Savings Scheme (ELSS) is a tax-saving SIP eligible for deductions under Section 80C of the Income Tax Act, 1961.

Is mutual fund investment comes under 80C?

Yes, investments in Equity Linked Savings Scheme (ELSS) mutual funds qualify for deductions under Section 80C of the Income Tax Act, 1961

Which investment is exempted under 80C?

Investments like ELSS mutual funds, Public Provident Fund (PPF), and National Savings Certificates (NSC) are exempt under Section 80C of the Income Tax Act, 1961

Which scheme comes under 80C?

The Equity Linked Savings Scheme (ELSS) is a mutual fund that comes under Section 80C for tax benefits.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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