Is SIP Tax-free?

A Systematic Investment Plan (SIP), commonly referred to as SIP, is one of the facilities offered by mutual funds to investors to invest in a disciplined manner. That is the best way of building wealth in a safe and disciplined manner. Here, the investors are allowed to invest a fixed amount of money at predefined intervals in the mutual fund scheme preferred by the investor.

Dissimilar to a lump sum investment, you spread your investment over a long period with a SIP. The minimum fixed amount of money is Rs. 500. And the predefined intervals can be weekly/monthly or annually. Hence, you do not have to have a lot of cash, to begin with, your mutual fund investment through SIPs.

Also Read about - What is SIP?

Is SIP Tax-free?

If an investor is investing through SIPs in equity funds or balanced mutual fund schemes, then all the gains made after one year will be considered as long-term capital gains that will be completely tax-free. For example, an investor invested Rs. 10 Lakhs and got a profit of Rs. 20 Lakhs for ten years. Then the entire redemption amount, Rs. 30 Lakhs, will be tax-free.

Therefore, the investor does not need to pay any taxes. So, yes, SIP investments are tax-free, but there are certain limitations to it. It is extensively explained below.

How does SIP Work?

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

When the markets are surging, you purchase fewer fund units while purchasing more fund units when the market is down. 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.

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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 beginning their mutual fund by starting a SIP. That is ideal for those having a standard type of revenue, like a salary.

You can redirect a part of your salary towards mutual funds by starting a SIP. That assists you with imparting a feeling of monetary control over the long run as you will be compelled to save a total at particular stretches.

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

2. When you invest through a SIP in the equity market, you will buy fewer units when the market is surging and more units when the market is down.

3. The rupee cost averaging results when you stagger your investments over an extensive stretch. That guarantees that you get substantially more returns when compared with a lump-sum investment.

4. You can stop your SIP at any time. Also, it is possible to redeem your funds at any time when there is no lock-in period.

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

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Benefits of Compounding

When you invest routinely through SIP and invest as long as possible, the advantages are amplified by the compounding effect. The compounding effect guarantees that you acquire returns on your principal amount (actual investment).

Yet, in addition to that, gains on the principal amount develop over the long-term as the cash you invested earns returns. Furthermore, the returns also acquire returns.

Check power of compounding – compound interest calculator.

SIP vs One-time Investment

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

Anytime is a good time to start investing in a SIP. You can start it at any time. It does not matter if Sensex is 25,000 or 39,000 if you want to invest in equity mutual funds through SIP.

It is prime to invest for the long-term, which means that you must start investing early to maximize the end returns. So you must follow the philosophy - Start Early, Invest Regularly to get the best out of your investments.

Hence, ELSS (equity-linked savings scheme) investments through SIPs are some of the best tax-saving investments. SIP comes with a lot of tax-free benefits and has 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 rebate of up to Rs 1,50,000 and save up to Rs 46,800 a year in SIP. SIP 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.