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Should I Start a Tax-saving SIP?

Should I Start a Tax-saving SIP?

Last Updated : May 30, 2020, 7:22 p.m.

SIPs or Systematic Investment Plans have been a popular medium of investing in mutual funds for many years. Most of us must invest some money every year to save taxes under Section 80Cof the Income Tax Act.

Among the options available, ELSS (Equity linked saving scheme) or commonly known as tax saving funds have been a popular choice of investment. Investing up to INR 1.50 lakh in tax saving funds is one of the better options. But most of us are confused whether we should invest in lump sum or do a tax- saving SIP.

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Well, it does not make a difference as far as the quantum of tax to be saved. But there is a key difference in how both of these work. Let us see how:

Say you invested INR 1.50 lakh in a tax-saving fund as a lump sum or in one go on the 10th February, 2019. This investment will be eligible for tax saving in Financial Year 2020. Since all tax saving funds have a compulsory lock-in of three years, you will be able to withdraw this money only after 10th Feb,2022.

Now instead of investing INR 1.50 lakh as a lump sum, you started a SIP of INR 12,500 per month (Rs 1.50 lakh annually) on 10th Feb 2019. So, in the financial year 2020, only two instalments would go-one in Feb and the other in March of Rs 12,500 each or Rs 25,000 in total. Thus, for the financial year 2020, you can claim tax deduction only for this Rs 25,000 and not 1.50 lakh. However, in the next financial year 2021, if all your SIP instalments are deducted every month, you will be able to claim a deduction of the entire 1.50 lakh. Another important difference to note is that in case of a tax- saving SIP every monthly instalment is counted as a new investment and the lock-in of three years is applicable. So, for the first instalment which went in Feb 2019, money can be withdrawn in Feb 2022. For the second instalment which got debited in March 2019, money can be withdrawn in March 2022 and so on.

So, one can invest through a SIP or lumpsum keeping the above in mind. The decision should be based on one’s cash flow, if you can spare INR 1.50 lakh in one go then you can opt for investing in a lump sum or start a SIP if you are comfortable investing systematically.

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