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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.
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.
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.|
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 great 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 lakh a year are made tax-exempt. Any gains over this limit are taxed at a flat rate of 10% plus applicable cess and surcharge. Dividends offered by all mutual funds are added to your overall income and taxed at your income tax slab rate.