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Systematic Investment Plans, or SIPs, are a popular investment tool for new investors and small investors who want to make disciplined investments over a long duration. You can avail of tax benefits under Section 80C on your SIP investments.
Financial stability comes from striking the right balance between caution and courage. While you cannot stack your cash away for safety, you cannot be reckless with your investments in the name of growth. To generate ample savings over time, you can safely follow the principle of ‘slow and steady wins the race’ by investing in SIP (Systematic Investment Plans).
Among the various investment plans and options available, SIP is an excellent investment option that can help you achieve your financial goals over time. What's more, SIP comes under the 80C Section of the Income Tax Act, and you avail tax* benefits on your SIP investment under 80C.
Let us find out more about how you can start investing in an 80C Systematic Investment Plan.
What is a SIP?
Before understanding the SIP 80C deduction, let us first get a brief idea of what an SIP is.
In simple terms, SIP, or a systematic investment plan, is an investment plan that permits you to invest a small amount of money regularly into an investment scheme of your choice.
You need not make a lump sum investment in a SIP, making it a great option for new investors or investors without a large corpus.
Moreover, you can set an auto-debit feature in your SIP account, under which the prescribed amount will be automatically deducted from your account on the due date, making it a disciplined saving option for you.
SIP Deduction Under Section 80C
Along with the above-mentioned benefits, SIP investments also offer tax benefits. You can reduce your tax liability by claiming a tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act. These tax-saving SIP investments include:
- Equity Linked Saving Scheme (ELSS)
- National Pension Scheme (NPS)
- Public Provident Fund (PPF)
- Employee Provident Fund (EPF)
- Sukanya Samriddhi Yojana (SSY)
- National Saving Certificate (NSC)
- Fixed Deposit (FD)
From the various SIP plans under 80C mentioned above, plans like EPF and PPF come with a long lock-in period, and you cannot liquidate your investments at this time. Moreover, plans like FDs provide modest returns, which may not be enough to beat inflation.
However, ELSS is one product that can provide you with reasonable returns for a shorter lock-in period. ELSS is a savings-linked equity-oriented mutual fund scheme. It is worth mentioning here that ELSS is the only mutual fund scheme that offers tax benefits, too.
Starting a SIP in ELSS Funds
ELSS SIPs allow you to make disciplined investments in the stock market# without taking any significant risk on your investment. Moreover, you can enjoy tax benefits on an ELSS SIP under 80C. The lock-in period for an ELSS investment is only 3 years, but it has the potential to offer much better returns than many other SIP plans under 80C.
You can enjoy tax deductions for all your investments made in an ELSS SIP throughout the year. Moreover, you can start investing in this SIP with an amount as low as ₹500 every month. Note that every SIP investment you make in ELSS has a lock-in period of 3 years. Therefore, the lock-in period for an ELSS SIP deduction in June 2023 will be over in June 2026, and the lock-in period for an ELSS SIP deduction in July 2023 will be over in July 2026.
Capital Gains Tax on SIP Investments
SIPs are capital assets, and you must pay a capital gains tax on them. The tax treatment on SIPs depends on the kind of fund you invest in and their holding period. Equity and debt funds are taxed differently under the capital gain tax.
Here is how SIPs are taxed for different fund types:
Nature of SIP |
Holding Period |
Tax Applicable |
Equity Funds (Except ELSS) |
< 1 Year |
Short-Term Capital Gain Tax |
|
> 1 Year |
Long-Term Capital Gain Tax |
Debt and Other Funds |
< 3 Years |
Short-Term Capital Gain Tax |
|
> 3 Years |
Long-Term Capital Gain Tax |
When Should You Start a SIP Investment Under 80C?
Ideally, you should start investing in a SIP at the start of the financial year, i.e., in the month of April itself. It will save you from last-minute emergency investments made towards the end of the financial year for tax savings. Moreover, you can spread your investments equally over the year and avoid undue financial burden.
Moreover, when you start investing in a SIP in your early life, you can accumulate substantial returns with the power of compounding over the years without feeling the heat of an excessive financial burden.
You need not make a lump sum investment in a SIP, making it a great option for new investors or investors without a large corpus.
Moreover, you can set an auto-debit feature in your SIP account, under which the prescribed amount will be automatically deducted from your account on the due date, making it a disciplined saving option for you.
Wrapping Up
SIPs or systematic investment plans are excellent investment plans for investors who want to invest in the market in a disciplined manner by making routine investments rather than a single lump sum investment. Moreover, you can avail of tax benefits under Section 80C of the Income Tax Act on your SIP investments.
