Is SIP Useful in Tax Saving?
SIPs are often considered one of the best ways to invest, with systematic investment plans in equity mutual funds giving an annual return of 10.26% from March 2014 to March 2019, greater than gold and FDs, according to an article in The Economic Times. During the same period, SIPs have become the preferred mode of investment for retail investors, changing the trend of investing in assets, such as gold and real estate.
What is SIP?
SIP or Systematic Investment Plans allow you to invest a fixed sum at regular intervals, such as weekly, monthly or quarterly in a mutual fund scheme of your choice. They allow you to build your wealth step by step, based on your ability to invest. There are various types of SIPs, with only some of them being tax saving SIPs. There are two main types of SIPs:
- Amount Based SIPs: In this type of SIP, a fixed amount of money is invested in your decided scheme at a regular frequency. The number of units are calculated by SIP Amount / Market price of the unit. The decimal values are ignored.
- Quantity Based SIPs: In this type, the quantity of units decided by you is purchased at a set frequency. The value of the order is calculated according to the current market value of the unit.
Benefits of SIPs
1. Disciplined Investing
Investing can be tricky and time consuming, but SIPs help with a disciplined investing approach. When you invest in SIPs, you commit yourself to save regularly and achieve long term gains.
2. Convenience
They are one of the most convenient ways to invest. You can start with investing in as little as ₹500 and increase the amount, based on how much you can put away as investment.
3. Compounding
SIPs help you grow your corpus over the long term due to the magic of compounding. The returns are added to the principal, which means that each time the interest is paid on a larger base.
4. Tax Benefits
Not all SIPs offer tax benefits. So, check for tax free SIPs before investing. Equity Linked Savings Schemes (ELSS), and Unit Linked Insurance Plans are some types of SIPs that do offer tax benefits.
Investing in tax saving mutual funds helps you in qualifying for tax deduction under Section 80C of the Income Tax Act. Not only can investors claim a tax deduction on the invested amount of up to ₹1.5 lakh for each financial year, but the interest generated is also tax exempt under Section 10(10)D.
While there are mutual fund tax benefits, it is always recommended to research carefully before making a final investment decision.