For FD, the minimum tenure is 5 years, but you can extend it up to 10 years.
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 several investment alternatives covered by Section 80C rules, which allow for annual tax deductions of up to Rs.1.5 lakh. Each of these possibilities has its own set of objectives, risks, and returns.
What exactly are ELSS funds?
The equity-linked savings scheme, or ELSS, is the only mutual fund that is eligible for Section 80C deductions. ELSS is a diversified equities mutual fund that provides tax benefits of up to Rs.1.5 lakh per year.
ELSS returns were previously tax-free. However, as of Budget 2018, long-term capital gains over Rs.1 lakh are taxed at 10%. The investor would not gain from indexation. Even after the 10% tax drop, ELSS has the potential to outperform other tax-saving products in terms of returns. The benefits of ELSS investing go beyond tax savings. If you invest for five years (the term of a tax-saving FD), the force of compounding assures that your money is doubled. Furthermore, the lock-in period is only three years long.
What are Tax Saving Fixed Deposits?
Individuals and HUFs can claim a tax deduction of up to Rs.1,50,000 every fiscal year by investing in fixed deposits with banks. These deposits have a five-year lock-in duration. This deposit, however, cannot be withdrawn prematurely. However, one advantage is that you can borrow against your FDs. The interest collected on these deposits, however, is taxable according to the individual’s tax bracket.
Here’s a quick rundown of the differences between ELSS and Tax Saving FDs in terms of several parameters.
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Definition
ELSS is a type of mutual fund that invests predominantly in equities or equity-oriented products. In traditional investment instruments you can invest as a lump sum with any bank.
Returns
In ELSS, it is not fixed and is subject to equity market risks. However, it has delivered 14%-16% returns in the last 5 years. Whereas in FD the bank decides the interest rate that starts from 6% to 7.5%.
Term
ELSS has a 3-year lock-in period, which is compulsory, after which you can redeem or reinvest. Talking about FD, the minimum tenure is 5 years, but you can extend it up to 10 years.
Risks
ELSS due to its equity exposure is risky but has delivered historically good returns. Whereas, 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 but not all banks offer an online facility to open an FD.
Read More: What’s Better, Savings Accounts Or Liquid Funds? Everything You Need To Know
Liquidity
You may exit or withdraw ELSS after 3 years but you cannot withdraw tax-saving FD before 5 years.
Where should you invest in ELSS or Tax saving FDs?
Before embarking on new financial initiatives, consider your age, investment horizon, and risk tolerance. ELSS should be preferred by those seeking the twin benefits of wealth building and tax benefits. Long-term investors with a higher risk tolerance may find ELSS to be a viable alternative. People nearing retirement might consider investing in tax-free savings accounts, which have low risks and assured returns.
In short, you should always select an investment strategy depending on your financial objectives and risk tolerance.
