We all want to save tax in the easiest way possible. And one of the easiest ways that can help you save taxes without any last-minute headache is by investing in tax-saving mutual funds, aka Equity Linked Tax Saving Schemes(ELSS) through Systematic Investment Plan(SIP).
ELSS is a tax-saving mutual fund that pools money from a large set of individuals and invests it in equity-related instruments, typically in shares of the companies. You can invest up to Rs.1.5 lakhs in a financial year and get tax benefits under Section 80C of the Indian Income Tax.
In this post, we will look at the different nuances of investing in ELSS through SIP.
How to invest in ELSS funds via SIP?
There are two ways to invest in ELSS funds: lump sum investments and through a SIP. Here’s how you can invest in ELSS through SIP.
Step 1
First, you need to calculate the amount of SIP you plan to invest. For instance, if you want to invest the entire 1.5 lakhs in ELSS, then you need to invest Rs. 12,500 per month through SIP. You can also invest more money. However, investments beyond Rs. 1.5 lakh will not aid in tax benefits but will help your investments grow.
Step 2
Almost all fund houses offer ELSS funds as an investment scheme. You need to select an ELSS scheme by considering the various parameters, such as past performance and fund manager, to start investing in an ELSS fund through SIP.
Step 3
You can now invest online or offline in the fund of your choice.
Set the date you want the fund house to auto-debit the SIP amount from your bank account.
Things to remember while investing in ELSS funds through SIP
• You need to keep the lock-in period in your mind, which is three years of ELSS funds.
• The three lock-in period is calculated from every instalment of the SIP, as each SIP is treated as a new investment.
• As the ELSS fund is an equity-linked investment, the performance of the fund will depend on the underlying instruments.
Advantages of investing SIP of ELSS fund
• When markets are down, you get more units of the fund with the same amount of SIP. And in the case of an upward market trend, you get fewer units at inflated prices. In short, SIP in ELSS funds helps you average the cost of investment in tax-saving funds.
• You will get reasonable returns with a tax saving facility under section 80C of the income tax act 1961, in which you can claim a deduction of up to Rs 1,50,000 and save tax of up to Rs 46,800.
• Investing in ELSS through SIP helps you become disciplined in tax planning.
How to redeem your investments?
In the case of SIP redemption, every SIP is treated as a new investment. Hence, the lock-in period is calculated from the date of every allotment of SIP.
For example, if your first SIP investment allotted you 200 units on the 1st of Jan 2023 and the second one is on the 1st of Feb 2023. You will be able to redeem these units after the 1st of Jan 2026 and the second one after the 1st of Feb 2026.
Conclusion
You can invest in an ELSS fund through SIP if you are looking forward to saving taxes but do not have a significant corpus to invest in one go. This will also help you in creating wealth over a period of time while saving tax as well.
