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All you need to know about tax benefits on SIPs

Author: Avnish Meheta
by Avnish Meheta
Posted: Mar 31, 2019

Investing in mutual funds can be quite profitable when it comes to gaining returns. However, like other sources of incomes, income from mutual funds is also liable to be taxed under the Income Tax Act of 1961.

But there are some specific mutual funds that have tax benefits under Section 80C of the Income Tax Act. For instance, investing through Systematic Investment Plans or SIPs makes you eligible to seek the mutual fund tax benefits under 80C.

What are SIPs?

SIP is essentially a method of investing in mutual funds. It allows a person to invest a fixed sum of money periodically into a mutual fund for a fixed period of time. With SIPs a specific amount of money is deducted periodically from one’s savings account and then put into the mutual fund of their choice.

Investing in SIPs makes a person eligible for the mutual fund benefit under Section 80C. The gains from ELSS SIPs belong under this category. Some of the features of SIPs include:

  • There are options to invest weekly, fortnightly, monthly or yearly when it comes to SIPs.
  • Most SIPs are taxed according to their holding period and nature.
  • Only SIPs in equity and balanced schemes of mutual funds can enjoy the tax savings benefits. The gains from the SIPs under these mutual funds are treated as long term capital gains and as a result are exempt from taxation.
  • However, if a person makes a monthly SIP and continues it for 12 months, only the gains from the first 12 months will be tax free. All other subsequent SIPs will be taxed.
  • The taxation on all the subsequent SIPs will be in accordance with short term capital gains taxation.

Benefits of investing in SIPs:

SIPs allow a person to invest less and earn more. Some of the benefits of investing in SIPs include:

  • a href="">SIP tax benefits
(ELSS) include availing tax deduction under the EEE format, that is, wealth accumulation, tax exemption and zero exit load format.

  • The lock in period for SIP ELSS mutual funds is comparatively much lower than other tax saving mutual fund options. The lock in period is only three years.
  • There are more long term benefits owing to compound interest with SIPs compared to other single time investment options.
  • The best ELSS SIPs are much more efficient in providing higher returns.

When people invest in ELSS SIP, they also enjoy the benefits of the ELSS they choose. For instance, the ELSS SIP lock in period is also for 3 years.

Additionally, the person will enjoy a tax benefit of up to Rs. 1.5 lakhs in capital gains, saving almost Rs. 45000 in taxes.

However, returns with SIPs, like all other forms of mutual funds are also entirely dependent on the performance of the market.

About the Author

If you are planning for a long-term financial goal, a mutual fund Sip that suits your objectives and your surety of getting exceptional results can be an excellent option.

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Author: Avnish Meheta

Avnish Meheta


Member since: Jun 01, 2017
Published articles: 7

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