Is Sip Tax Free?

Is SIP Tax Free? How to Start SIP To Save Tax?

Learn whether SIPs are taxable, how ELSS-based SIPs can help you save tax under Section 80C, and other key rules before starting a tax-saving SIP

Written by : Knowledge Centre Team

2026-02-09

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10 minutes read

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Many investors prefer SIPs because they make investing simple and disciplined. Still, a common doubt remains about whether SIPs can help save tax. SIP investment by itself is not tax-free, but SIPs in ELSS mutual funds qualify for deductions under Section 80C. 

This combination of affordability, flexibility, and tax benefits makes ELSS-based SIPs popular among working professionals and first-time investors. Before starting one, it is important to understand tax rules, lock-in periods, and the process of choosing the right fund. 

In this blog, we will help you understand how to begin a tax-saving SIP with clarity and confidence.

Key Takeaways

 

  • Under Section 80C, SIPs in ELSS provide tax benefits, including an annual deduction of up to ₹1.5 lakh
  • SIPs create wealth through compounding and rupee-cost averaging
  • Unlike lump sum investments, SIPs distribute investments over time to lower market risk
  • Long-term profits are subject to a 12.5% tax on gains above ₹1.25 lakh per financial year on ELSS SIP investments
  • Growth choices are tax-efficient, but dividends from SIPs are taxed according to the income tax bracket

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Tax Benefits of SIP Investments

Under Section 80C of the Income Tax Act, Systematic Investment Plans (SIPs) provide tax advantages (under the old tax regime) for investments made in Equity-Linked Savings Schemes (ELSS). The annual deduction of up to ₹1.5 lakh for contributions reduces taxable income.

ELSS investments also come with a lock-in period of 3 years, and for SIPs, each instalment has its own 3-year lock-in from the date of investment, providing both tax savings and potential for long-term capital appreciation. This makes SIPs an attractive option for tax-conscious investors. In addition, there’s an exemption under which long-term capital gains tax is not applicable if the gains are less than ₹1.25 lakh per financial year (under Section 112A; gains above this are taxed at applicable LTCG rates).

Wealth Creation Through SIP

Systematic Investment Plans (SIPs) are a powerful tool for long-term wealth creation, offering investors the benefits of compounding, rupee-cost averaging, and disciplined investing. By investing a fixed amount regularly in mutual funds, SIPs allow investors to accumulate wealth over time without the burden of timing the market.

The power of compounding ensures that even small investments grow exponentially as returns generate further returns.

Additionally, rupee-cost averaging helps mitigate market volatility by purchasing more units when prices are low and fewer units when prices are high. This, in turn, leads to better long-term returns. SIP investments also encourage financial discipline, making them an ideal option for individuals looking to build a significant corpus for goals like retirement, education, or homeownership. 

With the flexibility to start with as little as ₹500 per month, SIPs provide an accessible and structured approach to wealth accumulation.

Comparison of SIP vs One-Time Investment for Tax Saving

When planning ELSS investments, many people also compare SIPs with one-time investments to understand which works better for tax savings. Since tax on SIPs follows the same rules as lump-sum ELSS investments, both of which are eligible under Section 80C (old regime only), the decision often comes down to comfort and consistency. The table below will help you understand the difference between SIP and a one-time investment for tax savings:

CriteriaSIP Investments in ELSSOne-Time Investment in ELSS

Investment Mode

Regular monthly/quarterly investments over time

Lump sum investment in a single transaction

Tax Benefits

Eligible for benefits of tax under Section 80C of the Income Tax Act (old tax regime only)

Eligible for benefits of tax under Section 80C of the Income Tax Act

Investment Horizon

Long-term (typically 3+ years for tax-saving mutual funds)

Long-term (typically 3+ years for tax-saving mutual funds)

Investment Flexibility

Flexible, and can increase, decrease, or stop SIP anytime (subject to lock-in)

Fixed during a 3-year lock-in; redeemable thereafter

Risk Mitigation

Risk is averaged out over time due to rupee cost averaging

Risk is higher if the market is volatile at the time of investment

Amount of Investment

Low; starts with small amounts (as low as ₹500/month)

High; requires a large lump sum amount at once

Market Timing

Reduces risk of market timing through regular investments

Full investment depends on timing; it is more affected by market volatility

Returns

Returns are compounded monthly and can fluctuate based on market conditions

Returns are based on the market performance at the time of investment

Liquidity

Moderate; units can be redeemed anytime, subject to exit load rules

High; can redeem the entire amount at any time

Discipline

Encourages disciplined savings and investment over time

Requires full commitment upfront

Taxation on Redemption

Tax on gains when redeemed; long-term capital gains (LTCG) apply for holding longer than 1 year

Tax on gains when redeemed; long-term capital gains (LTCG) apply for holding longer than 1 year

Suitability

Ideal for individuals looking for regular savings and less market exposure

Suitable for individuals with a lump sum amount to invest and a higher risk tolerance

Financial Planning

Helps in better financial planning with disciplined investments

Can be a good choice if the individual has a surplus amount at once

Which is Better?

  • SIP: Best for investors who want to invest gradually, manage risk, and maintain financial discipline.

  • One-Time Investment: Suitable for those with a lump sum amount who want to maximise tax benefits instantly.

Is SIP Taxable or Not?

Since a large number of SIP investors are first-timers and begin with comparatively smaller amounts, they often stumble on the question of whether SIP income is taxable or not. Let us consider an investor who invests through SIPs in equity funds or balanced mutual fund schemes. Gains from equity SIPs after 1 year get ₹1.25 lakh tax-free annually under Section 112A (12.5% on excess); ELSS SIPs after 3-year lock-in automatically qualify as long-term gains.

For example, If an investor invests ₹10 lakhs via SIPs and realises ₹20 lakhs LTCG over 10 years (₹1.25 lakh exempt annually), the remaining gains are taxed at 12.5%. Therefore, the key SIP tax benefit for ELSS is the upfront Section 80C deduction up to ₹1.5 lakh (old regime).

Therefore, yes, SIP investments can offer tax-benefits, but there are certain limitations. It is extensively explained below.

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Did You Know?

Section 80C tax benefits of up to ₹1.5 lakh are only applicable under the old tax regime and not the new one.


Source: economictimes

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How Does SIP Work?

Each time you invest in a mutual fund scheme through a SIP, you buy a specific number of fund units proportional to the sum you invested. You do not have to time the markets while investing through a SIP, as you profit from bullish and bearish market patterns.

When markets are down, you purchase more fund units (lower NAV), while purchasing fewer when markets are surging (higher NAV). As the Net Asset Value (NAV) of all mutual funds is updated daily, the purchase cost might vary from one instalment to another. With time, the cost of purchase averages out and ends up being on the lower side. This is called rupee cost averaging, and that is how SIP investments work.

Why Should You Invest in SIP?

The SIP concept focuses on the philosophy “Save first, Spend next”. Instead of making a one-time investment, SIP allows you to invest small amounts at fixed intervals. The first-time mutual fund investor may consider starting a SIP. That is ideal for those with a standard form of income, such as salary.

You can allocate a portion of your salary to mutual funds by starting a SIP. This helps you build a sense of long-term financial control, as you will be required to save a set amount at set intervals.

The following are a few additional reasons for making investments in SIP:

  • You can start investing in mutual funds through SIP with just ₹500. You can increase your monthly SIPs whenever you want.

  • When you invest through a SIP in the equity market, you will buy fewer units when the market is surging (higher NAV) and more units when the market is down (lower NAV).

  • Rupee cost averaging results when you stagger your investments over an extensive period. This helps mitigate volatility.

  • You can stop or pause your SIP at any time. Also, redemption subject to fund rules (3-year lock-in for ELSS).

  • Investing through a SIP will make you disciplined while managing your finances.

Benefits of Compounding- When you invest regularly through SIP for as long as possible, the advantages are amplified by the compounding effect. The compounding effect guarantees you earn returns on both your principal amount and the previous gains it generates, which grow exponentially over time through compounding.

SIP vs One-time Investment for Tax Saving

Choosing between a systematic investment and a lump sum approach can influence how steadily your money grows and how effectively you manage risk. Both methods can support tax-saving goals (like ELSS under Section 80C, old regime), but they work differently in changing market conditions. The following is a comparison of how each approach behaves to help you select a comfortable investment style:

SIP InvestmentOne-time Investment
Periodic investmentsA lump sum amount invested through a single transaction
Spreads risk over time via rupee-cost averagingHigher immediate exposure if timed poorly
Earns more when the market is at a lowEarns high when the market is high 

Tax Benefits on Mutual Funds SIP

Here are five key benefits of SIP (Systematic Investment Plan) for tax saving, along with an explanation of capital gains tax:

  • Tax Deductions Under Section 80C: SIP investments in ELSS qualify for tax deductions up to ₹1.5 lakh per annum under Section 80C if you opt for the old tax regime, reducing taxable income and enabling tax savings.

  • Long-Term Capital Gains (LTCG) Tax Benefit: ELSS investments held for over 1 year attract a 12.5% LTCG tax on gains above ₹1.25 lakh per financial year, without indexation benefits, offering a tax-efficient option for long-term investors.

  • Rupee Cost Averaging: SIPs ensure regular investments regardless of market conditions, helping average out costs by buying more units at lower prices and fewer at higher prices, reducing volatility impact for better long-term returns.

  • Flexible Investment Amount: SIPs allow you to start with as little as ₹500 per month, making it easier to begin early and invest consistently, even with limited disposable income.

  • Compounding Benefits: Regular SIPs grow exponentially over time as both your investment and returns generate further returns, maximizing wealth creation.

Capital Gains Tax Explained

When you redeem your ELSS investment, the profit you earn is treated as capital gains. These gains are taxed based on how long you stayed invested. Here’s an overview of the same:

  • Short-Term Capital Gains (STCG): For investments held for less than 1 year, the STCG tax of 20%. However, this is not applicable for ELSS due to the 3-year lock-in.
  • Long-Term Capital Gains (LTCG): For investments held for more than 1 year, LTCG tax is 12.5% on gains exceeding ₹1.25 lakh per financial year.

SIP offers both tax-saving and growth benefits through disciplined, long-term investing.

When is the Right Time to Start Investing in a SIP?

Investing for the long term is a smart decision. Moreover, starting these investments early helps maximise returns. This philosophy is what makes ELSS (Equity-Linked Savings Scheme) investments through SIPs one of the best investment options. SIPs come with many tax benefits and have been gaining popularity among Indian mutual fund investors.

It allows an investor to invest in a disciplined manner without worrying about market volatility and timing the market. You can claim a tax deduction of up to ₹1,50,000 under Section 80C (old regime only) and save up to ₹46,800 a year in ELSS SIP. It is recommended for investors who are investing in mutual funds for the first time.

It is advisable to be clear about your financial goals while choosing your SIP scheme so that, along with your SIP income tax benefits, you can achieve your desired returns.

Regardless of age, this is the ideal time to begin your SIP. The earlier you start, the more substantial your wealth building will be. For financial discipline and the benefits of Rupee Cost starting your SIP at the beginning of each month. Ensure you get a steady enough income to invest comfortably in an SIP.

Furthermore, there are strong opportunities to start your investment journey when you receive a lump-sum payment or mark a significant. Finally, setting specific financial objectives will help to motivate and guide your SIP. It's important to remember that starting now will put you on the correct track towards reaching your financial goals.

How to Find Best SIP Plans?

Here are a few things to keep in mind choosing the best SIP plan for 10 years, or longer:

  1. Start Early: Regardless of age, the best time to begin your SIP is now. The earlier you start, the more substantial your wealth building will
  2. Time Advantage: SIP investments benefit from the power of compounding. The longer your investment horizon, the greater your potential returns
  3. Financial Discipline: Consider starting your SIP at the beginning of each month to instill financial discipline
  4. Steady Income: Ensure you have a steady enough income to comfortably contribute to your SIP regularly
  5. Special Occasions: Utilise lump sum payments or special occasions, like anniversaries, to kick start or boost your SIP investments
  6. Financial Goals: Setting specific financial objectives will guide and motivate your SIP journey
  7. Act Now: Starting now puts you on the right track towards achieving your financial goals through systematic investing

Final Words

Systematic Investment Plans have become a popular choice for long-term wealth creation and tax savings. They offer the advantage of rupee-cost averaging, disciplined investing, and flexibility in monthly/quarterly contributions. While SIPs are not entirely tax-free, they can provide significant tax benefits through Equity Linked Savings Schemes (ELSS) under Section 80C of the Income Tax Act. 

SIPs in ELSS allow investors to claim a deduction of up to ₹1.5 lakh per year, potentially saving them substantial taxes depending on their income tax slab. Additionally, SIPs promote early tax planning, which is essential for maximising tax savings and wealth creation. By incorporating SIPs into your financial strategy, you can not only boost your investment returns but also benefit from tax savings, making them a valuable tool for long-term financial planning.

Glossary

  1. Mutual Funds: A mutual fund pools contributions from many participants to invest in securities like stocks, bonds, and debt
  2. Market Volatility: Daily stock market fluctuations encompass significant and minor changes
  3. ELSS: Equity-Linked Savings Scheme is a tax-saving mutual fund investing ≥80% in equities
  4. Bullish and Bearish Market: A bull market is marked by rising prices, while a bear market sees falling prices and contraction
  5. Rupee Cost Averaging: RCA involves regular, fixed-amount investments regardless of market conditions, akin to a SIP
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FAQs

The SIP tax rate on capital gains investments in equity funds depends on the holding period of each specific SIP installment.

Yes, for SIP tax purposes, every instalment of the SIP is regarded as a separate investment with a unique holding period to calculate capital gains upon redemption.

Both SIP and lump-sum investments offer tax benefits, but the specifics depend on the type of mutual fund and the investor's tax bracket. For SIPs, the investment is spread over time, which reduces the impact of market fluctuations and allows for a more consistent return. This can reduce volatility risk due to the lower average cost of the investments. Lump-sum investments, on the other hand, can also provide tax benefits if the investor invests in tax-efficient funds, such as debt funds.

Investments made in Equity Linked Saving Scheme (ELSS) mutual funds are eligible for tax deductions under Section 80C of the Income Tax Act., However, those asking, “SIP investment is taxable or not?” the answer is thate there are no tax free SIP plan. Only deductions are allowed up to ₹1.5 lakh per year. 

No, you cannot claim tax benefits on all Systematic Investment Plan (SIP) investments. Tax deductions are only available for SIPs in specific government-approved schemes, primarily Equity Linked Savings Schemes (ELSS) and Unit Linked Insurance Scheme (ULIPs).

A strategic approach is necessary when investing for the long term, and in the current Indian financial environment, a Systematic Investment Plan (SIP) designed with a 20-year horizon is a wise decision. For individuals wishing to build money over time, investing in the best SIP plans for 20 Years in India can be an excellent decision.

 

If your SIP is in equity funds, gains after 5 and 10 years are taxed as long-term capital gains (LTCG) at 12.5% if your total profit crosses ₹1.25 lakh in a financial year. In fact, under the current capital gains law, LTCG is applicable only after one year.

No, the entire maturity amount of SIP is not tax-free. Only return of your principal is tax-free, and the profit is taxed based on whether it is short-term or long-term.

Yes, if each SIP instalment has completed one year in equity funds, then the gains on redemption will be taxable as long-term capital gains (LTCG), subject to the applicable exemption limit and tax rate.

Yes, long-term gains above ₹1.25 lakh per financial year are taxed at 12.5% on SIPs even after 20 years.

Yes, online financial tools like an SIP tax calculator show how much tax you may need to pay on your SIP gains at the time of redemption.

No, Mutual Fund SIP calculator can not help calculate tax on SIP; however they are a helpful tool to estimate your overall returns. To estimate tax, compute gains at redemption and apply STCG/LTCG rules based on each instalment’s holding period.

No. SIP is just a mode of investing in a mutual fund; taxation depends on the mutual fund category and the holding period of the units, not on whether you invested via SIP or lump sum.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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