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Under Section 80C of the Indian Income Tax Act, you can claim tax benefits on certain expenditures and investments. Example, ELSS and tax-saving FDs are two financial instruments that qualify for 80C tax exemption up to Rs. 1.5 lakhs per year. Each of these options comes with its own share of goals, risks and returns. 

  1. Equity Linked Savings Scheme
  2. Tax Saving Fixed Deposits
  3. ELSS vs Tax Saving FDs
  4. Should you invest in ELSS or Tax saving FDs?


1. Equity Linked Savings Scheme or ELSS

Out of the entire mutual fund landscape, the equity linked savings scheme or ELSS is the only mutual fund eligible for 80C deductions. ELSS is a diversified equity mutual fund that offers tax deductions up to Rs. 1.5 lakhs annually.

Prior to introduction of Budget 2018, its returns were completely tax-free. However, now it is subject to 10% long-term capital gains tax, if the capital gains after one year exceeds Rs. 1 lakh. Even after the 10% tax cut, ELSS has the potential to deliver superior returns compared to other tax-saving instruments. The perks of ELSS investments are not limited to the taxes saved. The power of compounding ensures that your investment is doubled if you invest for, say, 5 years (tenure of tax-saving FD). What is more, the minimum lock-in period is only 3 years.


2. Tax Saving Fixed Deposits

Investing money in Fixed Deposits with banks allows individuals and HUFs to claim a tax deduction of up to ₹1,50,000 in a financial year. These deposits have a lock-in period of 5 years. You cannot withdraw prematurely. But you can avail loans against your FDs at competitive rates. The interest earned on these deposits, however, is taxable as per the tax bracket of the individual.


3. ELSS vs Tax Saving FDs

Here is a quick overview of the of the differences between ELSS and Tax Saving FDs over various parameters:



Tax Saving FD

Definition ELSS is a type of mutual fund that invests predominantly in equities or equity-oriented products. A traditional investment instrument that you can invest as a lumpsum with any bank.
Returns Not fixed and subject to equity market risks. However, it has delivered 14%-16% returns in the last 5 years. The bank decides the interest rate – starts from 6% to 7.5%.
Term 3-year lock-in period is compulsory, after which you can redeem or reinvest. The minimum tenure is 5 years, but you can extend it up to 10 years.
Tax-efficiency 10% LTCG tax if the profit is above 1 lakhs after a year As per your tax slab
Lock-in 3 years 5 years
Risks ELSS due to their equity exposure is risky, but has delivered historically good returns. It assures capital protection and is as safe as any regular FD.
Online option One can start an ELSS online – as lumpsum or SIP Not all banks offer online facility to open an FD.
Liquidity You may exit or withdraw ELSS after 3 years. You cannot withdraw tax saving FD before 5 years.


4. Should you invest in ELSS or Tax saving FDs?

Before getting into new investment ventures, people consider a lot of things. Age, investment horizon and risk appetite are a few of the important factors. People who want dual benefits of wealth growth and tax benefits prefer ELSS. For instance, new investors with a long investment horizon and higher risk appetite find ELSS a sensible option. People nearing retirement can invest in tax saving FDs as they tend to have low risks and guaranteed returns.

In short, you must always choose an investment scheme based on your financial goals and risk profile. If you think that choosing a plan is tedious, you can always invest with ClearTax Save for handpicked and lucrative funds recommended by our experts. It is 100% paperless and the entire process takes no more than 7 minutes. Start investing. 

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