SIP in ELSS Funds: Smart Tax Saving Strategy for Salaried Investors

Post release of the Union Budget 2020-21 taxpayers now have two options while filing their ITR: the “old regime” and the “new regime”. 
 

• Under the old tax regime, you can still claim several deductions, such as those available in Section 80C, 80D, 80E, and more. 

• In contrast, the new tax regime removes most such deductions but offers lower slab rates.
   

Thus, firstly, as a salaried individual, you may choose the tax regime that results in a lower income tax liability. To make such an assessment, you can:

• Calculate your “gross annual income” from salary, interest, and other sources.

• Subtract eligible deductions (like 80C, 80D) to find taxable income under the old regime.

• Apply the respective slab rates to compute tax liability. 

• Calculate taxable income again “without ineligible deductions” and apply the new regime slab rates.

• Compare the final tax amounts under both options.

• You may choose the tax regime with a lower liability
   

If your calculation shows that the “old regime” could be preferred, you can start an SIP in ELSS mutual funds to further reduce your taxable income.

In contrast, if your calculation requires you to choose the “new regime”, investments in the ELSS scheme could still be made to potentially benefit from equity exposure. However, you will not be eligible for any tax-saving benefit under this option.

As per the current provisions, investments made in ELSS tax-saving funds can be claimed as a deduction up to ₹1.5 lakh in a financial year (regardless of how you invest, whether a lump sum or a SIP) under the old tax regime. 

If you choose the SIP route:

• All your monthly contributions across the year are added together and

• Then checked against this ₹1.5 lakh limit

It’s important to remember that this is not a separate limit just for the ELSS scheme. It falls under the overall cap of Section 80C, which also includes options like life insurance premiums, PPF, tax-saving fixed deposits, and more. 

If you have opted for old tax regime, the total amount invested via tax-saving SIPs can be deducted from your “gross” taxable income for the year, subject to a ₹1.5 Lakh limit. The reduced income (called your “net” taxable income) is then taxed according to the applicable slab rates. 

Thus, your tax savings depend on the tax bracket you fall into. The higher the bracket, the more tax you may save. For more clarity, let’s see the maximum tax you may save on your ₹1.5 Lakh ELSS mutual fund investment under each slab of the old tax regime:

Note: The above figures only show the “maximum” possible tax savings assuming the entire ₹1.5 lakh deduction falls within a single tax slab. Since income is taxed progressively, actual savings may be lower if the deduction spans multiple income tax slabs.

As an investor, you may start early in the financial year, instead of waiting till March. By starting your tax-saving SIP in April, you can spread your investments across 12 months. This also avoids last-minute pressure and helps you benefit from potential rupee cost averaging.
 

Additionally, some more tips you may follow are:

1) Align SIP Amount with the ₹1.5 Lakh Limit

Plan your monthly SIP so that your total annual contribution fits within the Section 80C cap. For example, 

• If you don’t have any other 80C deduction, you may start an SIP of ₹12,500 per month in ELSS funds. 
• The total contribution for the year will amount to ₹1.5 lakh, which can be claimed as a deduction.

This approach may avoid “over-investing” without additional tax benefit.

2) Choose the “Right” Tax-Saver SIP Plan

ELSS funds are actively managed equity schemes. Besides market conditions, their performance also depends on the investment decisions taken by the fund manager. 

Want to make a thorough assessment? You may evaluate an ELSS fund based on these metrics:
 

Tata ELSS Fund is an open-ended equity-linked savings scheme with a statutory lock-in of 3 years and tax benefits. The investment objective of the scheme is to provide medium- to long-term capital gains along with income tax relief to its unitholders, while at all times emphasising the importance of capital appreciation. 

However, there is no assurance or guarantee that the investment objective of the scheme will be achieved. The scheme does not assure or guarantee any returns. For more clarity, let’s check out its key features:

So now you know that an ELSS scheme is a “dual-benefit” mutual fund product that gives you exposure to equity markets while also allowing you to claim your invested amount as a deduction under Section 80C (up to ₹1.5 lakh in a financial year and only under the old regime). 

This product comes with a 3-year mandatory lock-in period, and you cannot redeem your units before this period ends. When you start an SIP, your total contribution for the year is added and compared against the ₹1.5 lakh limit, which also includes other 80C deductions. Beyond tax savings, ELSS mutual funds may also offer the potential for long-term equity growth. 

1) What happens if I invest more than ₹1.5 lakh in ELSS funds?

Only ₹1.5 lakh can be claimed as a deduction under Section 80C in a financial year. Any extra investment won’t give additional tax benefits, but it will remain invested and continue to generate potential returns like a normal equity fund.
 

2) Can I stop my ELSS SIP anytime?

Yes, you can stop your SIP anytime. However, each SIP installment has its own 3-year lock-in. So even if you stop investing, you cannot redeem the invested amounts until each installment completes its lock-in period.
 

3) Can I claim ELSS tax benefits under the new tax regime?

No, ELSS mutual fund investments do not provide any tax deduction under the new tax regime. In the new regime, ELSS can still be used for potential long-term wealth creation, but not for tax saving.

The views mentioned above are for information & educational purposes only and do not construe to be any investment, legal, or taxation advice. Investors must do their own research before investing. The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. Any action taken by you on the basis of the information contained herein is your responsibility alone, and Tata Asset Management Pvt. Ltd. will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. There are no guaranteed or assured returns under any of the schemes of Tata Mutual Fund.