ASystematic Investment Plan (SIP) is a popular financial instrument for millions of investors in India who use the option to buy mutual funds. SIPs allow weekly, monthly, quarterly, or bi-annual investments to be easily made and help create financial discipline. While many are aware of the fact that SIPs can create and preserve wealth over a long period of time, very few people are aware of the fact that SIPs can even help investors reduce their tax burden.
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80C and SIPs
One of the biggest ways of reducing one’s tax burden is by claiming the Rs 1.5 lakh deduction available under Section 80C of the Income Tax Act. Section 80C allows individuals to reduce their taxable income by up to Rs 1.5 lakh when they make certain investments. Investment options under Section 80C include Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), National Savings Certificate (NSC), Fixed Deposit (FD), Employee Provident Fund (EPF), life insurance, and more. However, the biggest drawback is the fact that these options do not offer high returns and also have substantially long lock-in periods. For example, the investments made in EPF and PPF are locked for 15 years while investments in FDs usually offer less than 10 percent returns.
There is another option within Section 80C that offers significantly higher returns and extremely short lock-in periods in comparison to the other options. The option is Equity Linked Savings Scheme. ELSS are, as the name suggests, tax savings-linked equity-oriented mutual funds. ELSS are the only types of mutual funds that offer any tax benefits.
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Funds invested into ELSS are locked in for a period of three years but have the opportunity to offer much higher returns than other Section 80C investment options. Just like how there are many different mutual fund schemes, there are several different kinds of ELSS as well. These include the Axis Long Term Equity Fund, which invests in a mix of large caps and a few select midcap companies.
One added benefit of ELSS is that one can invest in them using SIP, which allows the taxpayer to plan their tax saving potential under Section 80C each year. By spreading the investment throughout the year, people are able to plan around their taxes to claim the maximum deduction while also achieving the second goal of wealth creation.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
