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.
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Types of SIP schemes
Following are the basic types of schemes available in the market:
·
Top up SIP: These are the SIP schemes which allows us to increase our SIP amount at
regular intervals. This feature allows us to increase the amount to be paid at
the regular intervals if the mutual funds in which we are investing starts
performing better than expected.
· Flexible SIP: Under this type of SIP scheme, the investor can change the SIP amount according to his cash flow. Thus, if an investor is not in a position to pay the SIP instalment, then he can skip these instalments until he financially becomes stable. Similarly, if the investor has made some huge gains suddenly, then he can deposit more amount as SIP instalment according to time convenient to him.
· Perpetual SIP: Usually an investor signs an SIP mandate for a particular period of time viz. 1 year, 2 years, 5 years or more. But the perpetual SIPs are the schemes which allows the investor to redeem his funds whenever he wants. But is always considered better to start an SIP for a fixed period of time.
·
Trigger SIP: Such schemes are useful for the people
who are possessing good knowledge of the financial markets. The investor can
set an index level or a particular date to start an SIP. However, such schemes
are undesirable as they lead to speculation.
Further, different types of SIPs come under
these different categories and those types can be grouped according to the lock
in period.
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Best tax saving SIP
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.
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Benefit of SIP led ELSS
funds
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.
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