Investing in mutual funds has gained immense popularity over the past decade or so. The SIP route for investment in MFs has made it comfortable and easy for us to explore this asset class. The additional benefit you get from MF investment is saving on your taxes. Yes, by investing in ELSS mutual funds through the SIP route, you can get tax deductions for investments up to Rs. 1.5 lakhs under section 80C.
However, there are a few checkpoints that you need to consider before exploring the option of ELSS tax saving funds. Let’s look at four of those checkpoints:
Careful choice of ELSS scheme
You have dime-a-dozen ELSS schemes through the SIP route floating in the market. We are all aware how the high volatility of the equity markets. Thus, you are advised to exercise high caution while selecting your ELSS SIP scheme. A good starting point is a comparison of two or more SIP schemes based on performance and many other parameters. You can look at how they performed over the past 1 year, 2 years, 3 years, and 5 years horizon. All this information should be available on the MF’s website.
Make sure you choose your SIP date wisely
You know best about what points in a month you have funds in your account and when you don’t. Therefore, ensure that the SIP date for ELSS you choose is either on your pay-day or on a date you are confident to have sufficient funds to honor ELSS SIP installment.
Your lock-in period will be 3 years for each SIP
This is where most investors get confused. Unlike a lump-sum investment in ELSS, when you use the SIP route, please note the lock-in period commences from the SIP date for each monthly SIP. For instance, your ELSS SIP investment for Jan 2020 will be locked in up to Jan 2023. Similarly, the one for Feb 2020 will be locked in until Feb 2023, and so on.
Your tax deduction will be from the ELSS date until the financial year end
It is crucial for you to understand that tax savings on your ELSS SIP will be calculated from the SIP date until the financial year end. For instance, let’s say you commenced your ELSS SIP scheme for Rs. 10000 for three years in September 2019. You will now be able to avail a maximum deduction of Rs.70000, which is calculated as 7 months from Sep 2019-Mar 2020. Therefore, to claim a full year deduction, it is advisable that you start in April itself, which gives you the right to claim for all the 12 months in the financial year.
For more information on saving on taxes this financial year through investing in top ELSS SIP Schemes, write us on [email protected]
Mutual fund investments are subject to market risks. Please read the offer document carefully before investing.