SIP vs ELSS: Key Difference Between SIP and ELSS

SIP and ELSS are two of the most common terms you'll encounter when researching mutual funds. Therefore, it's no surprise that one might try to compare the two. Even though the title suggests that ELSS and SIP are comparable, in reality, they cannot be compared. 

Equity-linked Saving Scheme, or ELSS, as it is commonly called, is a type of tax-saving mutual fund scheme, while a Systematic Investment Plan, also known as SIP, is one of the two ways of investing in mutual funds.

Rather than comparing them, let's examine the concepts and features of both.

What is SIP? 

There are two ways of investing in mutual funds—the lump sum method or the SIP method. When you invest in a lump sum, you invest a big sum in a mutual fund. By contrast, when you choose the SIP method, you invest a particular amount in fixed intervals. 

By choosing the SIP method, you space out your investments over time. This helps you manage your investment across different market cycles. Also, it helps you develop an investment habit. You can start a SIP with as little as Rs 500 every month. 

If you don’t want to make monthly investments, you can also take a SIP every week, quarter or every six months. 

What is ELSS? 

ELSS, or Equity-Linked Savings Schemes, is one of several types of mutual funds available in the market. ELSS is a tax-saving mutual fund that helps you to save taxes on your investments. At the same time, it provides higher returns than FDs since returns are market-linked.

You can claim up to Rs 1,50,000 deduction per annum on your income under Section 80C of the Income Tax Act when you invest in ELSS. ELSS has the lowest lock-in period of all tax-saving investments—three years. Investing in ELSS can earn inflation-beating returns while enjoying tax benefits. 

Thus, we have clarified the difference between ELSS and SIP.

Difference Between SIP and ELSS:

SIP or ELSS, Which is Better?

By now, you should have understood SIP vs ELSS and how they are different concepts altogether. It really is not fair to compare a mode of investment with a type of mutual fund. 

Now, to highlight the most important point - An investor take advantage of both ELSS and SIP at the same time.

Since SIP is a mode of payment towards any mutual fund scheme, you can invest in ELSS via SIP.

Benefits of SIP:

• Provides convenience and affordability when investing
• Select from a variety of frequency options, such as weekly, monthly, quarterly, semi-annually, or annually. 
• Provides rupee cost averaging benefits, where your fund manager buys a higher number of units when the Net Asset Value (NAV) is low and a lesser number when the NAV is high.
• Helps you benefit from the power of compounding.
• An opportunity to save taxes and build wealth
• Tax-saving investments with the shortest lock-in period
• Long-term ability to beat inflation
• Provides inbuilt diversification by investing in different stocks belonging to different industries and market capitalizations.
• A high degree of transparency is provided
• The amount of investment is not limited

Benefits of ELSS:

Together, they make a smart and convenient tax-saving investment strategy.

However, we can look at the advantages of both. SIP helps you invest over a period of time. You can start your SIP journey with as little as Rs. 500 per month. These investments can be automated and, thus, help you develop an investment habit. 

ELSS can be an excellent way to benefit from tax deductions. At the same time, it helps you earn inflation-beating returns. If you want to increase your returns while enjoying tax benefits, you can choose to invest in ELSS. 

If you want the benefits of both, you can choose to invest in ELSS via SIPs. 

Conclusion 

Now that you understand the difference between ELSS and SIP, you can make smarter investment decisions for yourself. 

SIP vs ELSS FAQs

What is the upper limit of tax deduction one can avail through investment in ELSS under the Indian tax laws?

The maximum amount of tax deduction one can get from an ELSS investment is ₹1.5 lakhs per annum. It comes under Section 80C of the Income Tax Act, remember that you can invest more than this amount but only ₹1.5 lakh shall be considered for tax benefits.

How does the redemption process work for ELSS investments made via SIP, considering the lock-in period?

ELSS SIP investments each have a 3-year lock-in period from their own investment date. You can redeem them after 3 years from the initial investment or any subsequent SIP instalment. Remember, redemption isn't mandatory after 3 years; you can stay invested for continued growth.

What are the tax implications for the redemption of ELSS fund investments?

In case of redemption of ELSS fund investments, the gains are taxed under LTCG if you have held the investment for a period of more than one year. The LTCG is charged without indexation at 10 per cent on gains above Rs 1 lakh in a financial year