ELSS SIP: Best Systematic Investment Plan to Save Tax and Build Wealth

Watch this video to learn how to easily reattempt your rejected SIP transaction on ICICI Direct with the new payment reattempt feature. Follow simple steps and get your SIP back on track.

Save up to 15,600 extra rupees income tax with this easy method. How's this possible? Say hello to NPS — short for National Pension System. And here are three reasons why NPS should be on your investment radar:

Number one: Extra tax savings. Under the old tax regime, NPS shines with an exclusive deduction of up to 50,000 rupees per year under Section 80CCD 1B. So, if you are in the 30% tax bracket, a 50,000-rupee investment in the NPS can help you reduce your taxes by up to 15,600 Rs.

Number two: Returns. NPS has the potential for your wealth to grow while helping you save tax, and it also has amongst the lowest annual fees.

Number three: It is an Exempt-Exempt-Exempt scheme. In it, taxes exempt on investment, taxes exempt on accumulation, and taxes exempt on maturity. So, when you retire at the age of 60, you can withdraw 60% of your NPS corpus completely tax-free and draw a regular income from the balance amount through an annuity. And you can also opt to stay invested till you're 75.

Watch this short video to learn how to place stock SIP order on the ICICI Direct app

Systematic Investment Plan or SIP, if judicially used by investors can actually be that tool that can help people retire early by saving early. But one has to be cautious with type of mutual fund schemes he/she chooses. To exploit the full potential of SIP one point is clear, that one has to start investing in SIP at a young age. As more the time, more the gains from the compounding effect.

Let us understand with an example:

As one SIP calculator shows that if one starts investing Rs 1,000 per month, then assuming a return of 10%, the amount at the end of 20 years, this investor would get is Rs 7,18,259 due to the compounding effect.

Now, we will try show the power of investing an SIP at an early age. According to another SIP calculator, if a 25-year-old starts an SIP of Rs 5,000 per month, then assuming 12% return, the investor would have Rs 2.76 cr when he retires at 60. While another person who starts investing at the age of 30 years would get Rs 1.54 cr at 60. Clearly, a gain of Rs 1.22 cr for starting early. Clearly, it’s a big-big advantage for early birds. From this example it clear, the delay in SIP could cost you the few crores.

It is an investment product which encourages savings via equity. You would have heard from your CA, that invest in ELSS for saving tax. So, basically it is tax saving mutual fund product, wherein the investor gets an exposure of both; equity investments and fixed income securities in one fund thereby making it a well-diversified portfolio with good asset allocation.

Now, you might be thinking that, by investing in ELSS how could I save tax? So, under section of 80C of income tax act, we do not have to pay any tax on the amount invested in ELSS. The limit of this deduction is capped to Rs 1,50,000 pa and also there is a lock-in period of 3-years. And any ways, since investment has to be for long term, this lock-in is blessing in disguise.

Now, you might be thinking, What about the returns? Well, speaking about the returns, ELSS has given a good 12-15% return pa and considering that it also has tax deduction on the same, then why not go for it. And if we look at a different tax saving investments like PPF, NSC or FD, PPF gives a return around 7-8%, but with a lock-in period of 15-years. NSC on the other hand, gives around 6-7% with the lock-in of 6-years and FD gives a return of around 5% also has a lock-in period of 5-years.

So, here we can conclude, that ELSS is one of the best tax saving investment schemes. And if you are confused whether to invest via lumpsum or SIP, ideally this investment should happen on a monthly SIP basis for better rupee cost averaging. 

What is the best and safest way to invest in stock markets. Well, undoubtedly systematic investment plan is the best instrument. Systematic investment plan is commonly known as SIP, it gives you an opportunity to invest in shares indirectly and thus minimizing the risks of direct investment in shares. SIPs are offered by all mutual funds and once you subscribe sips, experts of mutual funds invest your money in various debt and equity instruments in a manner that with minimum possible risk you get reasonable returns on your investment. Simply put, in SIPs you gain when market zooms, but don't lose much in case of a crash.

How to subscribe SIPs?

You have the option of subscribing it yourself online or you can ask a broker to do it for you. You can even download a form fill it and then deposit it at the nearest office of your chosen mutual fund. For many mutual funds a company called CAMs handles all the paperwork, so you can even visit a CAMs office near you.

Applying SIP: Yourself vs Broker

Now, a look at the advantage of not going the broker way. If you do all the paperwork yourself and go for direct plans then you will not have to pay commission. The commission in case of brokers is small but over a long period it leads to substantial outgo from your returns.

Documents needed for SIP

You may like to know the documents needed for SIP. When you apply for an SIP, you would need copy of Aadhar card for address and id proof plus copy of PAN is mandatory. That is, you must have a pan if you want to subscribe SIP. Since amount fixed by you will be directly debited from your account so you are required to submit a check for the first instalment in case you are applying offline. This gives your bank details to the mutual fund for future auto debit facility.

Number of subscribers in SIP

How many family members can apply a single SIP you may be thinking. you can hold it solely or jointly with others. All holders are required to sign the form and submit PAN and Aadhar details. In case of minors, guardian details are required. In case you want to withdraw money then it will go to the account from which investments were being debited.

Key facts to remember

Here's something very important that you need to know while subscribing a SIP. While applying for the SIP always mention a nominee, this will ensure hassle-free withdrawal or transfer of SIP in name of nominee in case the primary holder suffers untimely death.

What do ELSS schemes invest in?

ELSS invest in a diversified basket of mostly shares and some debt.

What are the risks involved in ELSS?

ELSS invest in shares, and are therefore exposed to market risk.

What is the tax benefit of ELSS?

Investments in ELSS are deductible from taxable income up to Rs 1.5 lakh under section 80C of the Income Tax Act.

Are returns from ELSS tax-free?

You have to pay long term capital gain tax of 10% if returns are over Rs 1 lakh in a year.

What is the lock-in?

Among 80C investments, ELSS has the shortest lock-in of 3 years.

Can one invest in ELSS through SIPs?

Yes, you can invest in ELSS through SIPs. However, you will have to hold the units allocated against each installment for 3 years.

Start small

In some funds, we can start with Rs. 100 per month.

Invest with discipline

Regular monthly investments are better than ad-hoc investing.

Pay automatically

SIPs are convenient. You can have yours auto-debited!

Lower your risk

Lump sum investing exposes you to volatility risk.

Reduce cost ownership

SIPs reduce cost of ownership in volatile markets over the long-term.

Lumpsum Investment Systematic Investment Plan You invest a large sum in one go. You invest small amounts periodically, like every month. Ideal when prices are not volatile and are likely to steadily rise. Best in most conditions, but particularly when markets are volatile. You must time the market to get the best returns. You don’t need to time the market; just keep investing regularly. Good for seasoned investors, who have a higher risk appetite. Good for most investors, who prefer lower risk. Good for investments in liquid funds, which provide stable returns. Great for investments in equity mutual funds, where returns are volatile.