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Everyone likes to save on tax and increase their take-home earnings. Keeping this in mind, the government of India provides various tax-saving investments under Section 80C of the Income Tax Act, 1961. Two such investment avenues are tax-saver mutual funds – Equity Linked Savings Schemes (s) or Fixed Deposits (FDs). Let’s compare these two options to understand the ideal investment route for your portfolio.
What are the ELSS funds?
ELSS mutual funds are tax-saving mutual funds that serve the dual benefits of capital appreciation and deductions on tax.These are diversified equity mutual funds with 80% of their corpus in equity and equity-linked instruments. These funds offer tax deductions of up to Rs1.5 lakhs u/s 80C in a financial year. The long-term capital gains or LTCG gains are taxed at 10% post Rs1 lakh. LTCG up to Rs1 lakh is completely exempted for tax. The perks of ELSS mutual funds are not limited to tax saving. Since these funds invest the majority of their corpus in equity funds, the returns are significantly higher than traditional tax-saving FDs. The lock-in period of ELSS funds is just 3 years.
What are Fixed Deposits?
Just like ELSS funds, individuals and HUFs are eligible for tax deductions up to Rs1.5 lakhs u/s 80C.These deposits are accompanied by a lock-in period of 5 years.Also, you can avail loans against your fixed deposits. Capital gains earned on these tax-saving investments are taxed as per the tax bracket of the investor.
ELSS vs Fixed Deposits
| Parameter | ELSS | Tax-saver FDs |
| Definition | These tax saving mutual funds invest predominantly in equity or equity-linked securities | These are traditional investment instruments where an individual can save a part or all of his savings for fixed tenure and interest rate. |
| Returns | Returns on ELSS funds are subject to equity market risk. They generally provide an average return of 14-16% in tenure of 5-10 years. | The bank decides the interest rate. Returns are guaranteed, around 6-8% |
| Lock-in period | 3 years | 5 years |
| Risk factor | Equity-related risk | Almost negligible to low risk |
| Flexibility | An investor can start an ELSS online as an SIP or lumpsum | Not all banks offer the online facility to open an FD |
| Tax efficiency | 10% LTCG tax on capital gains above Rs1 lakh | As per your tax slab |
| Dividends | Dividends earned on ELSS funds are not taxable | Interest earned on FDs are taxable |
| Joint account | An individual can make a joint investment | A joint investment can be made |
Should you invest in ELSS or tax-saving FDs?
Before zeroing out on your investment instrument, consider parameters such as your age, risk profile, financial objectives, and investment horizon. Individuals wishing to seek dual benefits of tax deductions and capital appreciation should consider investing in ELSS. These investors usually have a long-term investment horizon with a high-risk appetite.On the other hand, individuals leaning towards retirement should consider investing in tax-saving FDs as they are endowed with low risks and guaranteed returns. Happy investing!
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