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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, ELSS and tax-saving FDs are two financial instruments that qualify for 80C tax exemption of up to Rs. 1.5 lakhs per year. Each of these options comes with its own share of goals, risks, and returns. 

  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?

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.

Previously, ELSS returns were completely tax-free. However, post Budget 2018, the long-term capital gains tax in excess of Rs 1 Lakh would be taxed at 10%. The investor would not get 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, 5 years (tenure of tax-saving FD). To add to that, the minimum lock-in period is only 3 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 ₹1,50,000 in a financial year. These deposits have a lock-in period of 5 years. You, however, cannot withdraw this deposit 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. 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:

Particulars

ELSS

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, people consider a lot of factors; age, investment horizon and risk appetite being a few among them. People who want dual benefits of wealth accumulation and tax benefits prefer ELSS.

Long term investors with higher risk appetite find ELSS a sensible option. People nearing retirement may 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 Invest 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.