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Under Section 80C of the Indian Income Tax Act, you can claim tax benefits on certain expenditures and investments. For instance, you can claim a tax deduction for expenses incurred on your children’s tuition fees, home loans (principal component), stamp duty, etc. On the investment front, you can claim deductions by investing in ELSS, tax saving FDs , PPF (Public Provident Fund), NPS (National Pension Scheme) etc. Each of these options comes with its own share of goals and features.

  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?
  5. Why should you invest with ClearTax?

1. Equity Linked Savings Scheme

ELSS is a diversified equity mutual fund that offers tax deductions up to ₹1,50,000 under Section 80C. Although the long-term capital gains above ₹1,00,000 are taxed at 10% PA, it is still an interesting option as the investors enjoy the dual benefits of earning high returns and ELSS schemes having the lowest lock-in period(3 years) compared to other tax-saving investments.

 

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 and no premature withdrawals or loans against the FDs are permitted. 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:

ParticularsELSS
Tax Saving FD
Where is the money invested? Most Asset Management Companies (AMC) offer ELSS to investors. Being a diversified equity mutual fund, most of the corpus is invested in equity-related products. These deposits can be opened with any bank offering Tax saving FD schemes.
What are the expected returns? Since the funds are invested in the market, the returns can vary according to the performance of the invested securities. You can expect an average return of around 12-14% in these schemes though. While the interest rates may vary slightly with each bank, the usual rate of interest offered is between 6.5 and 7.5% p.a.
Is there any minimum and/ or maximum tenure? ELSS has a mandatory lock-in period of 3 years. Post that, you can continue to stay invested for as long as you want. Tax Saving FDs have a mandatory investment period of 5 years minimum. You cannot hold these deposits for more than 10 years.
What about the risks involved? Being equity oriented, ELSS schemes carry an element of risk. However, returns from these funds are known to be good over a longer tenure. These are completely risk-free as they are similar to regular fixed deposits offered by banks.
Are the returns taxed? Gains come under long-term capital gains and they are taxed at a rate of 10% The interest earned on these deposits is taxed as per the tax bracket of the investor.

As can be seen above, both ELSS and FDs offer a tax deduction of up to ₹1,50,000. But, ELSS has a lower lock-in period and the gains earned are relatively high compared to tax saving FDs. This makes ELSS investments more viable than tax saving FDs.

 

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.

ELSS is generally preferred by people who want to grow wealth and also avail tax benefits. Mostly new investors who have a long investment horizon and who can take a high risk invest in ELSS.

People nearing retirement can invest in tax saving FDs as they tend to have low risks and guaranteed returns.

 

5. Why should you invest with ClearTax?

1. ClearTax helps you choose handpicked and lucrative funds recommended by our experts.

2. Go for our 100% paperless investment that saves on cost, time and effort.

3. Your investment proof will be sent to your email instantly.

4. Save up to Rs. 45,000 on taxes every year.

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