ELSS vs FD: Meaning, Comparison and More

ELSS is a modern tax-saving instrument with equity exposure, whereas FDs are traditional tax-saving options without equity exposure risk. ELSS mutual funds and tax-saving FDs are two of the various investment options covered under Section 80C provisions that provide tax deductions. Under Section 80C, up to Rs.1.5 lakh a year can be eligible for deductions. Each of these options comes with its set of goals, risks, and returns.

What are ELSS Funds?

Among all mutual funds, the equity-linked savings scheme (ELSS) is the only one covered under Section 80C deductions. ELSS is a diversified equity mutual fund with 80% equity exposure that offers tax deductions of up to Rs.1.5 lakhs annually.

Key features of ELSS

Deductions

Under Section 80C of the Income Tax Act, ELSS mutual funds offer tax deduction benefits, allowing deductions of up to ₹1.5 lakhs in a financial year.

Lock-in Period

ELSS mutual funds have a mandatory lock-in period of three years from the date of investment, which is the shortest lock-in period.

Risks

ELSS investments are subject to market risks as they primarily invest in equities. The returns are not fixed and can vary depending on market performance.

Liquidity

ELSS offers liquidity after the lock-in period, allowing you to redeem your investment after three years.

Returns

ELSS has the potential to offer higher returns compared to traditional fixed-income investments due to equity exposure in investments.

What is Tax Saving Fixed Deposits?

Investing in tax-saving fixed deposits with banks allows individuals and HUFs to claim a tax deduction of up to Rs.1,50,000 in a financial year. These deposits have a lock-in period of five years. However, you cannot withdraw this deposit prematurely. However, a positive point is that you can get loans against your FDs. However, the interest earned on these deposits is taxable as per the individual's tax bracket.

Key features of FDs

Deductions:

Under Section 80C of the Income Tax Act, saving fixed deposits offer tax deduction benefits by allowing deductions of up to ₹1.5 lakhs in a financial year.

Lock-in Period

Tad saving FDs have a mandatory lock-in period of 5 years and cannot be withdrawn until the lock-in period finishes.

Risks

FDs offer a fixed rate of interest, which is agreed upon at the time of initial investment. The returns are fixed and not subject to market fluctuations.

Liquidity

Fixed Deposits offer liquidity, allowing you to withdraw 100% of your funds after the lock-in period of 5 years.

Returns

Returns on FDs are fixed according to interest rates, and these FDs are considered safe instruments as they are backed by banks and financial institutions and insured by RBI up to a certain amount in urban and regional banks.

How ELSS funds are different from Tax Saving FDs?

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

Should you invest in ELSS or Tax-saving FD?

Before making a new investment, you must consider important factors such as your age, investment horizon, and risk appetite. Those who want to reap the dual benefits of wealth accumulation and tax benefits should prefer ELSS over fixed deposits.

Long-term investors with a higher risk appetite find ELSS as a sensible option.

People approaching their retirement should consider investing in tax-saving FDs as they tend to have low risks and guaranteed returns.

In short, you should always choose an investment scheme based on your financial goals and risk profile. If you are finding it challenging to pick the best ELSS funds, then you can contact ClearTax Invest for handpicked and lucrative funds recommended by our experts.

Taxability of ELSS and FDs

Both tax-saver FDs and ELSS provide tax benefits under the provisions of Section 80C of the Income Tax Act,1961. However, the returns offered by these instruments are taxed differently. 

Tax-saver FDs are not as tax-efficient as ELSS as the interest is added to your overall income and taxed at your income tax slab rate. This is a significant disadvantage if you fall under the highest tax brackets. This is where ELSS scores much better. Long-term capital gains of up to Rs 1.25 lakh a year are tax-exempt. Any gains over this limit are taxed at a flat rate of 12.5% LTCG plus applicable cess and surcharge. Dividends received from ELSS mutual funds are added to your overall income and taxed at your income tax slab rate.

Conclusion

ELSS offers higher returns and more tax benefits but comes with higher risk and a 3-year lock-in. FD, on the other hand, offers fixed returns, low risk, and more stability. The final choice depends on your risk appetite and financial goals. ELSS is a suitable instrument for growth and tax savings, while FD is for safety and guaranteed returns.

ELSS offers higher returns and more tax benefits but comes with higher risk and a 3-year lock-in. FD, on the other hand, offers fixed returns, low risk, and more stability. The final choice depends on your risk appetite and financial goals. ELSS is a suitable instrument for growth and tax savings, while FD is for safety and guaranteed returns.