Why Are SIPs Considered to be the Best Tax Saving Instrument?

What is a systematic investment plan (SIP)? A mutual fund house offers an investment mode wherein you can put a fixed amount of money in a chosen scheme at regular intervals (monthly, quarterly, half-yearly, or yearly). After selecting the best mutual fund, you can start depositing as little as ₹500 in it through SIP and enjoy various other benefits like significant tax savings. Here is why SIPs are considered the best tax-saving instrument.

How Can SIP Help You Save Tax?

A significant part of your income goes into tax payments, reducing your savings. But the good news is you can invest flexibly in the top tax-saving mutual funds or equity-linked savings scheme (ELSS) funds through SIP for wealth creation.

In this case, you are eligible to claim a deduction of up to ₹1.5 lakh from your taxable income in a financial year, according to the Income Tax Act, Section 80(C). ELSS funds are the only equity funds that allow you to claim such a high tax deduction. By investing up to ₹1.5 lakh per year, you as a taxpayer can save around ₹46,800 in the highest income slab of 30%. You can invest in multiple ELSS funds through SIP to maximize your tax-saving benefits.

When Should You Start Tax Planning?

The ideal time to begin tax planning is investing in the top tax-saving mutual funds through SIP in April. Since 2023 has just begun, you can start tax planning soon. Thus, you can get the maximum time to invest up to ₹1.5 lakh in the year to claim a tax rebate.

Other Benefits of Investing Through SIP

Rupee Cost Averaging: It is difficult to accurately predict the right time to enter and exit the market. Rupee cost averaging allows you to invest a specific amount regularly regardless of whether the market is high or low. You can purchase more units when the market is low and fewer units when the market is high. This reduces your average cost of investment per unit over a long period.
Financial Discipline: Since you deposit a fixed amount periodically, it helps you build the financial discipline of saving regularly. That way, you can stay more dedicated to achieving your financial goals. Since the minimum investment amount is very low, it won't burn a hole in your pocket, unlike a sizeable lump sum payment.

Conclusion

When you remain invested in the best mutual funds via SIP over the long term, you can save more with the power of compounding. This happens as your fund returns are reinvested in a similar scheme to get more units. So, wait no more and start investing in the top tax-saving mutual funds via SIP. For that, consider an AMFI-registered mutual fund distributor.

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