If you file your income tax returns yourself, then you must know how tedious task it is to assess taxable income and filing the income tax return. It literally consumes even more energy and time when your personal finance is decentralised to more than one financial avenue. In this complicated scenario, it becomes almost a challenge for the taxpayer to save on his income tax.
According to us, income tax saving is a broad concept in itself. In previous decades, filing the income tax returns usually sounds like a monstrous task to majority of the people, so they did not even bother about saving the tax as filing the returns alone appears to be a satisfying thing to them. Actually, back then, people were not so much aware even about the term “income tax savings’’. After that when people started getting the income tax things into their mind, they started taking this concept a bit seriously. They used to plan their incomes and try to save on their income tax through various means(sometimes unethical).
But, today when people are highly literate and are a lot familiar with the complex world of taxation system, they take the income tax assessment and income tax saving, both together. Today there are numerous options available to a tax payer through which he can cut on his income tax. Income tax saving calculator/income tax calculator is serving taxpayers for a long time to plan their income tax and make a cut on it. But, today apart from such tools used solely for the purpose of tax saving. There are many other options available which not only helps in saving the income tax, but also generates some good returns for the investor.
Systematic Investment Plans (SIPs) are one of those options. Investing in SIPs is becoming one of the topmost priority of many aspiring investors in the market. A SIP is an investment route directed towards the mutual funds wherein a person can invest a fixed amount in mutual fund schemes of different kinds at regular intervals of time-be it once in a month or once in quarter, instead of putting a lump sum money. It’s similar to investing a fixed amount at regular intervals in a Fixed Deposit scheme. Thus, SIPs help in investing in a more disciplined manner.
SIPs generates descent returns for the investors and the SIP market is consistently growing making the potential investors inclined more towards it. Another advantage is that is an investor can start investing in a SIP even with as little as Rs. 500 per month. It creates a good option for the new investors to enter the market.
Following are the basic types of schemes available in the market:
Further, different types of SIPs come under these different categories and those types can be grouped according to the lock in period.
Now the issue comes is in which type if SIP one should invest or keeping our motive in view, which is the best tax saving SIP. If you are noticing the recent trends of the SIP market, then you must have heard about the Equity linked saving schemes (ELSS) which are sometimes referred to as tax saving funds. ELSS is one of the best tax saving vehicles which provides a deduction under the section 80C of the Income Tax Act. This is a diversified mutual fund equity scheme which is usually entered into by the investor for a lock in period of 3 years.
If you invest in an ELSS fund trough an SIP, then you as a taxpayer becomes eligible for an income tax deduction of Rs. 1,50,000 u/s 80 C of the Income Tax Act. For example: If according to your taxable income you are coming in the 30% tax bracket and you have invested Rs.1,50,000 in ELSS funds, then that Rs.1,50,000 will be deducted from your total taxable income and thus you will be able to save Rs. 45000 (30% of Rs.1,50,000) on your income tax.
There are many instances observed where some investors invest in the ELSS funds at the end of the financial year. This is wrong investment approach and strategy. In such a scenario, one can face the issues related to the cash flows and also investing at such times forces the investors to invest a lump sum amount in such schemes. It creates market timings related risk. It is always advisable to invest in an ELSS scheme through a SIP route to get the benefit of rupee cost averaging.
Another benefit of investing in the ELSS fund through SIP is that these funds are having the shortest lock-in period of 3 years while other products have the lock in periods ranging from the 5 to 15 years. But it does not mean that while investing in the ELSS funds you should redeem your funds as soon as the lock in period of 3 years comes to an end. One should not forget that ELSS funds falls under equity asset class, thus the funds once invested should stay invested in such schemes for at least 5 to 7 years for getting good returns. Only then you will be able to use the full potential of these funds to generate superior returns along with getting a tax break.