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Mutual Fund Investments are a great way to save for the future and enjoy tax benefits. ELSS offers both capital appreciation potential and income support. While SIP allows investors to make regular investments into mutual funds over time. In this article, let’s compare ELSS Vs SIP to see which one is a better option to invest your money.

What is ELSS?

ELSS stands for Equity Linked Savings Scheme, which is an investment instrument for tax saving. The scheme invests primarily in stocks with lower volatility than traditional equity funds. If you invest Rs. 150,000 in ELSS, you can save up to Rs. 46,800 every year. It reduces your taxable income by that amount.

Introduced on 1st January 2006, the scheme aims at providing incentives for investments into the securities market through mutual funds. Section 80C (1) of the Income Tax Act, 1961 incorporates the exemptions of the scheme. ELSS provides returns at low-risk levels. It also offers deductions under Section 10(38) of the Income Tax Act, 1961.

What is SIP?

SIP, also known as a Systematic Investment Plan, allows investors to invest a small amount of money on a periodic basis. You can invest frequently and earn better returns through SIP than the lump sum methods of investing. By investing in a mutual fund through a SIP, you can gradually grow your wealth over time. SIPs allow you to invest small amounts on a periodic basis. You can opt for weekly, monthly, quarterly, or bi-annual, depending on your preference as an investor. Investing through SIP provides you the benefits of compound interest. It means when your money earns returns, you reinvest the gains. The total amount then grows by earning more. 

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ELSS Vs SIP – What is the Difference Between ELSS and SIP?

As discussed above, ELSS is a long-term tax-saving instrument and you can invest in it through a SIP. It simply means SIP is a method through which you are investing in any given scheme regularly. The following comparison of ELSS Vs SIP will help you understand them better:

It is an investment instrument that helps you generate high returns and save taxes.It is only an investment method that helps you save in a disciplined way. 
You can enjoy a tax deduction of up to Rs. 150,000 in a year.The tax deduction is only applicable if the investment is done in ELSS.
It has a lock-in period of 3 years.No lock-in period except for investments in ELSS
The switch option is available only after the lock-in period is over.The switch option is available if an investment is not being made in ELSS.
Tax saving is a major benefit of ELSS.Rupee cost averaging is a major benefit of SIP.

Benefits of SIP and ELSS

Benefits of SIP

  • Investment Discipline: SIPs serve as a valuable tool for individuals who are new to the investment landscape and may not possess extensive market knowledge. Investing becomes convenient and cost-effective. With the option to invest as little as Rs 500, SIPs to all kinds of investors, who encounter challenges when it comes to saving money.
  • Rupee Cost Averaging and Power of Compounding: SIP maintains a consistent investment amount. When the Net Asset Value (NAV) of the mutual fund decreases, more units are added to your account, and when the NAV rises, the investment’s value increases. Consequently, SIP effectively evens out rupee fluctuations. Also in the long term, you can enjoy the power of compounding. 

Benefits of ELSS

  • Tax Benefit: ELSS schemes are mutual funds that offer tax benefits on the investment amount. Investments up to INR 1,50,000 per annum qualify for tax exemption under Section 80C of the Income Tax Act. This tax benefit is exclusive to the ELSS category. 

However, it is important to note that this is not a difference between the SIP and ELSS. SIP is a type of mode of investment in mutual funds. Thus, you can also invest through SIP in ELSS mutual funds.

ELSS vs SIP – Which is Better?

ELSS is an investment vehicle, while SIP is a way of investing not only in ELSS but in any other mutual fund. Therefore, you cannot compare ELSS with SIP as it is not an apple-to-apple comparison. Therefore, investors can combine both concepts together to earn the maximum benefit. 

Investing in ELSS through SIP can help investors benefit from the systematic tax savings options and do not have to struggle the last minute for lumpsum amount to reduce their tax incidence. Also, investing through SIPs is a way to create savings discipline and give them the benefit of rupee cost averaging.

Frequently Asked Questions

What is the maximum benefit available for ELSS funds?

The maximum benefit available for ELSS funds is INR 150,000 under Section 80C of the Income Tax Act, 1961.

How are the units redeemed under ELSS funds if they are invested through SIPs?

When investors invest in ELSS funds through SIPs, the units bought first will be redeemed first when such units complete the lock in period of 3 years. In simple words, the redemption will be based on the first-in, first-out basis, where units are held by the investor for a minimum period of 3 years.

What is the tax implication of redemption of investments through ELSS funds?

ELSS funds provide tax benefits of up to INR 1,50,000, but they are not tax-free at the time of redemption. During redemption, ELSS funds are subject to long term capital gains tax. However, taxpayers benefit from exemption up to INR 1,00,000 per financial year, beyond which they are taxed at a 10% rate.