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ELSS vs FD: Meaning, Comparison and More

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Under Section 80C of the Indian Income Tax Act, you can claim tax benefits on certain expenditures and investments. ELSS mutual funds and tax-saving FDs are two of the various investment options covered under Section 80C provisions that provide tax deductions of up to Rs.1.5 lakh a year. Each of these options comes with their set of goals, risks, and returns. We have covered the following in this article:

  1. What are ELSS Funds?
  2. What are Tax Saving Fixed Deposits?
  3. How are ELSS funds different from Tax Saving FDs?
  4. Should you invest in ELSS or Tax saving FDs?


1. What are ELSS Funds?

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

Previously, ELSS returns were tax-free. However, post Budget 2018, the long-term capital gains tax over Rs.1 lakh are taxable at 10%. The investor would not get the benefit of indexation.

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, five years (tenure of tax-saving FD). Furthermore, the minimum lock-in period is only three years.

2. What are Tax Saving Fixed Deposits?

Investing in 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. But a positive point is that you can avail loans against your FDs. The interest earned on these deposits, however, is taxable as per the tax bracket of the individual.

3. How are ELSS funds different from 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 lump sum 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 on the gains over and above 1 lakhs 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 a lump sum or SIP Not all banks offer an 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, you must consider factors such as your age, investment horizon, and risk appetite. Those who want dual benefits of wealth accumulation and tax benefits should prefer ELSS.

Long-term investors with higher risk appetite find ELSS to be a sensible option. People approaching retirement should consider investing 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.

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