Systematic Investment Plan is widely used by investors who want to invest in mutual funds. SIPs enable investors to invest small amounts of money periodically, which makes it possible for investors to grow their wealth in the long run.
However, many investors are confused over the taxation of SIPs specifically if it is tax-free or not under Section 80C of the Income Tax Act, 1961.
In this blog, we will explore the taxation on SIP investment under section 80C.
What is SIP Investment?
SIP is a mode of investment where the investor invests a fixed sum of money at periodic intervals like monthly, quarterly, and so on into a particular mutual fund scheme.
SIP investment provides benefits like rupee-cost averaging, freedom of making a small amount of investment, etc. It also offers an auto-debit feature where the prescribed amount will be debited automatically from the given account on the due date.
This makes investing more disciplined for the investors. Additionally, disciplined investment also helps achieve long-term goals without deviating from the path.
What Is Section 80C of the Income Tax Act?
Section 80C of the Income Tax Act, 1961, allows individuals and Hindu Undivided Families (HUFs) to claim deductions from their gross total income for certain investments and expenses. As of the latest information available, the following investments qualify for deductions under Section 80C:
- Equity Linked Savings Schemes (ELSS): ELSS mutual funds fall under equity mutual funds and are entitled to tax deductions under section 80C. ELSS funds have a lock-in period of 3 years for the investment made by the investors.
- Public Provident Fund (PPF): Any deposit made with PPF accounts is eligible for tax deductions under Section 80C. The maturity period of PPF is 15 years.
- Employee Provident Fund (EPF): EPF contributions paid by salaried employees also qualify for tax deductions under Section 80C.
- National Savings Certificate (NSC): Investments in NSC are eligible for tax deductions under Section 80C. NSC lock-in time varies based on the nature of the problem.
- Sukanya Samriddhi Yojana (SSY): Investments made in SSY accounts for the benefit of girl children are eligible for tax deductions under Section 80C.
Now that we are clear about the basics, let’s understand “Is SIP under 80c tax-free.”
Also Read: How to save tax in India?
Is SIP Under 80C Tax-free?
SIP investments in mutual funds are not directly eligible for deductions under Section 80C unless SIPs are investments in ELSS funds.
With ELSS funds, investors can claim tax deductions up to ₹1.5 lakh in a given fiscal year, thanks to the funds’ unique structure that offers tax benefits under Section 80C.
Here are some primary points you need to know:
- SIP IN ELSS Funds: Investments made in ELSS mutual funds by SIP investment fall under the provisions of section 80C and are subject to the overall limit of ₹1.5 lakh.
- Lock-in Period: ELSS mutual funds have a 3-year lock-in period i.e., they are more liquid than other tax-saving options such as PPF and NSC.
- Tax on Gains: While SIP investments may not provide deductions under Section 80C (except for ELSS), gains made in mutual fund investments are subject to taxation based on the holding period and type of mutual fund (equity or debt).
Tax Benefits of SIPs in ELSS Mutual Funds
There are numerous tax advantages to investing in ELSS mutual funds through SIP.
- Tax Deduction: Investments up to ₹1.5 lakhs in ELSS mutual funds in a financial year can be claimed as a deduction under Section 80C. This deduction reduces the taxable income, resulting in lower tax liability. The tax savings can be substantial, especially for individuals in higher tax brackets.
- Long-Term Capital Gains Tax Exemption: ELSS mutual funds offer the benefit of long-term capital gains tax exemption on investments held for more than one year. Capital gains up to ₹1.25 lakh are exempt from tax, and any gains beyond that are taxed at a concessional rate of 12.50%. This exemption encourages long-term investment and helps investors build wealth over the long term.
- Dividend Income Tax Exemption: Dividends received from ELSS mutual funds are also exempt from tax. This is because ELSS mutual funds are equity-oriented funds, and dividends paid by equity-oriented funds are exempt from tax under the Income Tax Act. This tax exemption provides an additional benefit to investors, as they can earn tax-free income from their ELSS investments.
Conclusion
SIP is a convenient and disciplined way to invest in mutual funds. However, it is essential to understand the tax implications associated with your investments before investing. SIP investments in ELSS mutual funds qualify for deductions under Section 80C, allowing investors to save taxes up to ₹1.5 lakh annually.
However, for investors seeking liquidity and flexibility without a lock-in period, non-ELSS mutual funds through SIP provide growth potential but do not offer tax benefits under Section 80C.
