tax savings

The advantages of SIP investment plans and how they help with tax savings


Investing for the future is an exciting and dynamic opportunity yet taxes can take a hefty portion of returns in a way many investors hadn’t expected. A systematic investment plan or SIP can help reduce this burden. SIPs can be an ideal tax-saving investment option, especially for investors who want to reduce taxes on their income.

An SIP is an investment method that helps investors invest in mutual funds in both a disciplined and cost-effective manner. With an SIP, the investor is required to regularly contribute towards their mutual fund scheme in fixed intervals which can lead to the accumulation of wealth and long-term overall financial security. It helps investors to manage their investments without having to worry about volatile markets or economic fluctuations.

Here are the top advantages that come with SIP investment plans and how this method can be one of the best tax-saving options with better returns.

  • Auto pay feature instils financial discipline

SIPs come with an auto-pay feature that allows investors to set up automatic payments from their bank accounts directly into their investment accounts on a predetermined date each month. This helps make investing simple and hassle-free, as investors can skip remembering or manually initiating payments every month. They can simply set their SIP payment once and forget about it until they need to adjust or stop making payments altogether.

  • Flexibility of selecting preferred amount & frequency

With SIPs, investors can choose how much they want to invest each month and how often they want their money invested (i.e., weekly, monthly, quarterly). This added flexibility allows investors to have more control over their investments.

  • Benefit of rupee-cost averaging

Investing through an SIP involves leveraging the power of rupee-cost averaging. This approach helps mitigate the risks associated with timing the markets by allowing investors to make regular automatic contributions towards their investments – regardless of market conditions. With this approach, investors are able to buy more units when the price is lower and fewer units when prices become higher. Over time, this approach reduces the average cost per unit and can potentially increase returns. 

  • Calculate returns with a mutual fund SIP calculator

To make the process of SIP investing easier, an online mutual funds SIP calculator can be used to estimate potential returns in advance. With this calculator, investors can easily calculate approximate returns by inputting three basic details – desired investment amount, return rate, and the number of years to stay invested. This enables investors to wisely choose the best mutual funds to invest that may offer maximum returns and decide how much they should invest for maximum growth.

How do SIP investments help with tax savings?

Investing in an Equity-Linked Saving Scheme (ELSS) through SIP can help investors to save on taxes. This taxsaving mutual fund type allows investors to claim up to Rs1.5 lakh tax deduction under section 80C of the Income Tax Act, 1961, along with the potential for enhanced returns. Investors can strategically distribute their investments over time and manage their risk, all while taking advantage of tax savings. Those in the highest tax slab (30%) can effectively save up to Rs. 46,800 a year in taxation by investing in ELSS mutual funds via the SIP route.

Additionally, ELSS mutual funds have a lock-in period of three years, which is the lowest among all section 80C investments like Public Provident Fund (PPF) and National Pension Scheme (NPS).

Closing notes

Before investing through a SIP, it is important to understand the tax implications of mutual funds investment. Profits generated from a mutual fund are considered capital gains, which can be further divided into short-term and long-term gains.

Capital gains on equity fund investments are subject to 15% tax if the holding period is less than one year, while debt funds incur taxes based on the investor’s tax bracket if held for less than three years. If the holding period exceeds three years, long-term capital gains tax at 20% with indexation is applicable for debt funds. If equity funds are held for over a year, capital gains on them are considered long-term capital gains and are tax-exempt up to Rs 1 lakh; above this limit, the gains are taxed at 10% without indexation benefits.

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