The main difference between ELSS (Equity-Linked Savings Scheme) and SIP (Systematic Investment Plan) is that ELSS is a tax-saving investment option, while SIP is a method to invest in mutual funds regularly, with or without tax benefits, providing flexibility in investment choice and strategy.
Table of Contents
What Is ELSS?
Equity Linked Savings Scheme (ELSS) represents tax-saving mutual funds investing predominantly in equity markets. These funds offer tax deduction under Section 80C up to ₹1.5 lakh while maintaining a mandatory three-year lock-in period and potential for capital appreciation.
These schemes combine tax benefits with equity market returns, providing systematic wealth creation opportunities through professional portfolio management and diversified equity exposure across market capitalizations.
ELSS offers the shortest lock-in among tax-saving instruments, the potential for higher returns through equity participation, professional fund management, and systematic investment opportunities through monthly SIP options.
What is SIP?
Systematic Investment Plan (SIP) enables regular investments in mutual funds through fixed monthly contributions. This disciplined approach helps build long-term wealth while managing market volatility through rupee cost averaging.
SIPs facilitate automatic investment scheduling, eliminate timing-related decisions, provide flexibility in investment amounts, and help develop systematic saving habits through scheduled monthly deductions.
The approach benefits from market cycles, reduces average purchase costs, maintains investment discipline, and supports long-term wealth creation through consistent participation regardless of market conditions.
Difference Between ELSS And SIP
The main difference between ELSS (Equity-Linked Savings Scheme) and SIP (Systematic Investment Plan) is that ELSS is a specific type of mutual fund offering tax benefits, whereas SIP is an investment strategy to invest in mutual funds regularly, irrespective of tax advantages.
| Aspect | ELSS (Equity-Linked Savings Scheme) | SIP (Systematic Investment Plan) |
| Definition | A type of mutual fund offering tax benefits under Section 80C. | A method of investing a fixed amount regularly in mutual funds. |
| Purpose | Primarily for tax savings and wealth creation through equity. | A disciplined approach to investing in mutual funds over time. |
| Tax Benefits | Eligible for tax deductions under Section 80C (up to ₹1.5 lakh). | No direct tax benefits. |
| Investment Type | Equity-focused mutual fund with a 3-year lock-in period. | Can be used for any type of mutual fund (equity, debt, hybrid). |
| Lock-in Period | 3 years minimum for tax benefits. | No lock-in period (except in case of ELSS). |
| Returns | Equity returns, which may be volatile but have long-term growth potential. | Returns depend on the type of mutual fund chosen for SIP. |
| Flexibility | Less flexible due to the lock-in period. | High flexibility; you can stop, pause, or modify SIP anytime. |
| Risk | High risk due to equity exposure. | Risk depends on the fund type chosen for SIP. |
| Taxation | Long-term capital gains (LTCG) tax after 3 years. | Taxation depends on the fund chosen for SIP (LTCG/short-term). |
Benefits Of ELSS
The main benefits of ELSS (Equity-Linked Savings Scheme) include tax savings under Section 80C, the potential for high returns through equity investments, a lock-in period of just 3 years, and the ability to build wealth over the long term with equity exposure.
- Tax Benefits: ELSS allows tax deduction under Section 80C of the Income Tax Act, up to ₹1.5 lakh per annum, reducing taxable income and offering substantial tax-saving opportunities.
- High Return Potential: As an equity-oriented investment, ELSS offers the potential for high returns over the long term, capitalizing on the growth of the stock market.
- Wealth Creation: By investing in equity, ELSS helps in wealth creation over the long term, leveraging the growth potential of the stock market and compounding returns.
- Diversified Portfolio: ELSS funds typically invest in a diversified portfolio of stocks, reducing risk while maximizing return potential, as compared to investing in individual stocks.
- Easy Investment through SIP: ELSS can be invested via SIP (Systematic Investment Plan), allowing investors to invest small amounts regularly, making it easier for individuals to start investing with lower amounts.
Disadvantages Of ELSS
The main disadvantages of ELSS include market volatility risk, as returns depend on stock market performance. The 3-year lock-in period restricts liquidity, and its equity exposure may not be suitable for conservative investors seeking stable, fixed-income returns.
- Market Volatility Risk: ELSS invests in equities, making them subject to market fluctuations, which can lead to unpredictable returns and increased risk, especially during market downturns.
- Lock-in Period: The 3-year lock-in period restricts access to funds, limiting liquidity and preventing investors from withdrawing their investments during short-term market crises or personal financial needs.
- Not Suitable for Conservative Investors: Due to heavy equity exposure, ELSS may not be suitable for conservative investors seeking stable returns or those who prefer low-risk investments like fixed deposits or bonds.
ELSS Tax Benefits
The main tax benefit of ELSS (Equity Linked Savings Scheme) is its eligibility for tax deduction under Section 80C of the Income Tax Act, offering deductions of up to ₹1.5 lakh per year. Additionally, long-term capital gains (LTCG) on ELSS are tax-efficient after three years.
- Tax Deduction: ELSS qualifies for tax deduction under Section 80C, offering a deduction of up to ₹1.5 lakh annually, reducing taxable income and lowering overall tax liability.
- LTCG Tax: ELSS investments held for over 3 years attract long-term capital gains (LTCG) tax of 10%, making it more tax-efficient than other equity investments.
Benefits Of SIP
The main benefits of SIP (Systematic Investment Plan) include disciplined investing, rupee cost averaging, and the power of compounding. SIP allows investors to invest regularly, mitigate market volatility, and build wealth over time with a small initial investment.
- Disciplined Investing: SIP encourages regular, disciplined investment, helping investors stay committed to long-term goals without worrying about market timing, thereby promoting financial discipline and consistent wealth accumulation.
- Rupee Cost Averaging: By investing fixed amounts regularly, SIP helps average the cost of units, reducing the impact of market fluctuations and allowing investors to buy more units when prices are low.
- Power of Compounding: SIP harnesses the power of compounding, where returns earned on previous investments generate more returns, helping investors grow their wealth over time with minimal effort and time commitment.
- Low Initial Investment: SIP allows investors to start with a small amount, making it accessible to a wide range of individuals. It encourages even small investors to participate in wealth creation with regular contributions.
- Mitigates Market Volatility: SIP helps smooth out the impact of market volatility by spreading investments over time. It reduces the risk of investing a lump sum during market peaks, ensuring long-term growth despite short-term fluctuations.
Disadvantages Of SIP
The main disadvantages of SIP include the potential for lower returns during consistently poor market conditions, limited flexibility in adjusting investment amounts, and the risk of investing in underperforming funds without regular monitoring or adjustments. Additionally, SIP doesn’t guarantee profits.
- Market Conditions: SIPs may deliver lower returns during prolonged market downturns, as investments are spread across various market cycles, which can impact the overall growth during negative periods.
- Limited Flexibility: Once committed, SIP investments are rigid with predefined amounts. Adjusting contributions or pausing them may not always be feasible depending on the fund’s terms.
- Underperforming Funds: SIP doesn’t guarantee returns, and without active monitoring, you may continue investing in underperforming funds, potentially reducing the benefits of compounding over time.
- No Guaranteed Profits: SIPs don’t ensure profits or minimize losses. The value of the investment depends on market performance, so there is always a risk of earning less than the invested amount.
SIP Tax Benefits
The main tax benefit of SIPs is that investments in ELSS (Equity-Linked Savings Schemes) through SIP are eligible for deductions under Section 80C of the Income Tax Act, up to ₹1.5 lakh, reducing taxable income and offering potential tax savings while growing wealth.
- Section 80C Deduction: SIPs in ELSS qualify for tax deduction under Section 80C of the Income Tax Act, allowing taxpayers to reduce their taxable income up to ₹1.5 lakh annually.
- Capital Gains Tax: ELSS investments held for more than 3 years qualify for long-term capital gains (LTCG) tax, providing a favorable tax treatment compared to other equity investments.
- Tax-Deferred Growth: SIPs in tax-saving ELSS funds enjoy tax deferral, as gains are taxed only at the time of redemption, allowing investors to benefit from compounding over time.
- Potential Tax-Free Returns: Since LTCG exceeding ₹1 lakh is taxed at 10%, SIPs in ELSS funds can potentially yield tax-free returns if gains remain below the ₹1 lakh limit.
- Flexible Tax Planning: SIPs in ELSS funds provide an opportunity for systematic tax planning, helping investors reduce their taxable income while benefiting from market-linked growth in the long run.
How to Invest in SIP?
Start by opening an investment account with Alice Blue, completing KYC requirements, selecting suitable mutual fund schemes, and setting up a monthly SIP with a preferred investment amount and date following a systematic investment approach.
Process involves choosing fund categories, determining investment duration, setting up auto-debit facilities, maintaining adequate bank balance, and monitoring investment progress through regular portfolio review.
Success requires maintaining investment discipline, ensuring timely payments, understanding fund objectives, tracking performance metrics, and following systematic portfolio rebalancing aligned with financial goals.
Do you want to expand your knowledge about mutual funds? We’ve got a list of must-read blogs that will help you do just that. Just click on the articles to find out more.
| AMFI mutual fund |
| ULIP vs SIP |
| Weekly Sip Vs Monthly Sip |
| Mutual Fund Vs Index Fund |
| Difference Between XIRR And CAGR |
| What is contra fund? |
| Types Of Sip |
SIP vs ELSS – Quick Summary
- The main difference between ELSS and SIP is that ELSS is a tax-saving scheme with a lock-in, while SIP is a regular investment method, offering flexibility without tax benefits.
- ELSS offers tax savings under Section 80C, invests in equities for potential returns, and provides a 3-year lock-in. It combines wealth creation and tax-saving benefits, allowing SIP investments for long-term growth.
- SIP is a disciplined approach to investing regularly in mutual funds, helping build wealth over time with rupee cost averaging. It offers flexibility in amounts and reduces the impact of market volatility.
- The main benefits of ELSS include tax savings under Section 80C, potential high equity returns, a short 3-year lock-in period, and long-term wealth accumulation through equity exposure.
- The main disadvantages of ELSS are market volatility, risks linked to stock performance, and the 3-year lock-in that limits liquidity. It may not suit conservative investors looking for stable returns.
- The main tax benefit of ELSS is the Section 80C deduction of up to ₹1.5 lakh annually, along with tax-efficient long-term capital gains after three years, making it a tax-efficient investment.
- The main benefits of SIP are disciplined investing, rupee cost averaging, and compounding. It helps investors invest regularly, mitigate volatility, and build wealth with small, consistent contributions.
- The main disadvantages of SIP are lower returns in poor market conditions, limited flexibility, and the risk of underperformance without monitoring. SIP doesn’t guarantee profits and requires regular adjustments for optimal performance.
- The main tax benefit of SIPs is that investments in ELSS through SIP are eligible for Section 80C deductions up to ₹1.5 lakh, offering tax savings while growing wealth through systematic investing.
- To set up a SIP with Alice Blue, complete KYC, choose mutual funds, set a monthly amount, and establish auto-debit. Monitor investment progress and maintain discipline to achieve financial goals.
- Open a free demat account with Alice Blue in 15 minutes today! Invest in Stocks, Mutual Funds, Bonds & IPOs for Free. Also, trade at just ₹ 15/order and save 33.33% brokerage on every order.
ELSS Vs SIP – FAQs
The main difference between ELSS (Equity-Linked Savings Scheme) and SIP (Systematic Investment Plan) is that ELSS is a type of mutual fund offering tax benefits, while SIP is a method to invest in mutual funds regularly.
ELSS is a tax-saving mutual fund that primarily invests in equities. It qualifies for tax deductions under Section 80C of the Income Tax Act, with a 3-year lock-in period, offering both growth potential and tax advantages.
SIP is a method of investing in mutual funds by contributing a fixed amount regularly. It enables investors to buy units at different market levels, thereby averaging out the purchase cost over time.
To invest in ELSS, select a mutual fund scheme that qualifies for tax benefits, decide the investment amount, and choose a lump sum or SIP option. Complete KYC, and invest through the Alice Blue platform.
ELSS SIP investments are not entirely tax-free but offer tax deductions under Section 80C up to ₹1.5 lakh annually. Long-term capital gains (LTCG) over ₹1 lakh are taxed at 10% without indexation benefits.
The main risk of SIP is market volatility. As SIP involves investing in equity markets, returns depend on market performance. Short-term fluctuations can impact returns, although long-term investments may mitigate this risk.
Yes, SIP is allowed in ELSS. Investors can invest a fixed amount regularly in ELSS funds through SIP, which provides an opportunity for disciplined, long-term tax-saving investments with the benefit of rupee cost averaging.
Investors with a low-risk tolerance or those looking for short-term returns should not invest in ELSS, as it has a 3-year lock-in period and its performance is tied to the volatility of equity markets.
Investors with no long-term investment horizon or those unable to commit to regular payments should avoid SIP. SIP is more effective for disciplined, long-term investors aiming to benefit from rupee cost averaging.
No, SIP is not 100% safe as it involves investing in equity markets, which carry market risk. While SIPs can reduce risk through regular investing, returns are not guaranteed, and losses can occur during market downturns.
Disclaimer: The above article is written for educational purposes and the companies’ data mentioned in the article may change with respect to time. The securities quoted are exemplary and are not recommendatory.
