Under Section 80C of the Indian Income Tax Act, you can claim tax benefits on certain expenditures and investments. For instance, you can claim tax deduction for expenses incurred on your children’s tuition fees, home loans (principal component), stamp duty, etc. On the investment front, you can claim deductions by investing in ELSS (Equity Linked Savings Scheme), FDs (Fixed Deposit), PPF(Public Provident Fund), NPS (National Pension Scheme) etc. Each of these options comes with its own share of goals and features.
ELSS is a diversified equity mutual fund that offer tax deductions up to ₹45,000 under Section 80C. As the income earned from comes under Long-term Capital Gains, it is tax-free. of the Income Tax Act. Hence investors enjoy the dual benefit of saving on taxes as well as earn high returns. These schemes have the lowest lock-in period of 3 years.
Putting money in Fixed Deposits with banks allows individuals and HUFs to claim tax deduction of up to ₹150,000 in a financial year. These deposits have a lock-in period of 5 years and no premature withdrawals or loans against the FDs are permitted. The interest earned on these deposits, however, is taxable as per the tax bracket of the investor
Here is a quick overview of the pros and cons of investing in ELSS vs. FD:
Particulars |
ELSS |
Tax Saving FD |
Where is the money invested? |
Most Asset Management Companies (AMC) offer ELSS to investors. Being a diversified, equity mutual fund, most of the corpus is invested in equity-related products. |
These deposits can be opened with any bank offering Tax saving FD schemes. |
What are the expected returns? |
Since the funds are invested in the market, the returns can vary according to the performance of the invested securities. You can expect an average return of around 12-14% in these schemes though. |
While the interest rates may vary slightly with each bank, the usual rate of interest offered is between 6.5 and 7.5% p.a. |
Is there any minimum and/ or maximum tenure? |
ELSS has a mandatory lock-in period of 3 years. Post that, you can continue to stay invested for as long as you want. |
Tax Saving FDs have a mandatory investment period of 5 years minimum. You cannot hold these deposits for more than 10 years. |
What about the risks involved? |
Being equity oriented, ELSS schemes carry an element of risk. However, returns from these funds are known to be good over a longer tenure. |
These are completely risk-free as they are similar to regular fixed deposits offered by banks. |
Are the returns taxed? |
Since ELSS have a lock-in period of 3 years, the gains earned on them are long-term capital gains; which are tax free. |
The interest earned on these deposits is taxed as per the tax bracket of the investor. |
As can be seen above, both ELSS and FDs offer tax deduction of up to Rs.150,000. But, ELSS has a lower lock-in period and offers tax-free gains which is a better proposition as compared to tax saving FDs. This makes ELSS a superior tax saving option as compared to a tax saving FD.