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ELSS vs FD – Difference between ELSS and FD

ELSS vs FD - Difference between ELSS and FD

ELSS vs FD – Difference between ELSS and FD

Type of mutual fund where money goes into equity market Type of deposit where a specific amount is put into an account for a fixed tenure
Varied returns Guaranteed returns
Prone to risks Little or no risks
Minimum lock-in period of 3 years Five-year lock-in period for tax-saving MFs; flexi lock-in period for other FDs
Dividend earned is not taxable Interest earned is taxable
Loan cannot be availed Loan can be taken against regular FD, but not against tax-saver FD


Equity Linked Savings Scheme (ELSS) and tax saver Fixed Deposit (referred here as FD) are two products that are popular with investors as they offer tax deductions. Which of these two is a better option when it comes to tax planning? In this article we take a closer look at the ELSS vs FD debate, exploring the features of each and factors like lock-in-period, liquidity, returns and tax implications that will help one make a correct decision.

ELSS refers to diversified equity mutual and is the only mutual funds that offer a benefit of up to Rs 1.5 lakh u/s80C of Income Tax Act. Fixed deposits with bank with a lock-in period of 5 years are also eligible for a deduction of up to Rs 1.5 lakh u/s 80C. As far as this feature is concerned ELSS and FD are similar. But when comparing ELSS vs FD, there are some differences too.

Lock-in period: All tax savings investments come with a lock-in period. ELSS has a lock-in period of 3 years. However investors can stay invested till anytime. Tax Saver Fixed Deposits have a lock-in period of 5 years. Investors can however stay invested till 10 years. When we look at the ELSS vs FD in terms of the lock-in period, ELSS thus has an edge.

Tax implications: When making the FD vs ELSS comparison, the tax implications need to be taken into account. As mentioned earlier both ELSS and tax saver bank FDs provide an exemption of up to Rs 1.5 lakh u/s 80C of Income Tax Act. In case of ELSS any capital gains over Rs 1 lakh is taxed as capital gains after the government introduced long term capital gains of 10 per cent on gains from equity and equity mutual funds if the amount crosses Rs 1 lakh in a financial year. This is applicable to ELSS too. In case of FDs, the interest earned on tax saving FD gets added to the annual income of the taxpayer and is taxed as per the income tax slabs he falls in.

Liquidity: For ELSS, withdrawals are not allowed before the 3 year period is over. For 5-year bank FDs withdrawals are not allowed before the 5 year period. One cannot also take a loan against these FDS.

Returns: In the comparison between ELSS vs FD, returns offered by each of these products play an important role. Since ELSS invests in diversified equity mutual funds, they come with a certain amount of risk. Returns on ELSS is not fixed and is linked to the markets. However ELSS has been shown to give consistently high returns over the long term. In the last 5 years ELSS as a category has given average returns of 15.52 per annum. When one takes a 3 year period the return is 14.49 per cent. 5- year bank FDs on the other hand bear much lesser risk and hence provide comparatively lower returns. However the returns are guaranteed. Currently 5 years FDs are offering interest rates in a range of 6-7.25 per cent. Rates for senior citizens are 0.50 per cent higher.

With both these products offering tax benefits u/s 80C, many investors have a question whether ELSS or tax saver FD is a better option. Before choosing an investment various factors need to be taken into account. The risk appetite of the investor, his age, his investment horizon are some of the key factors plus one should also look at returns, liquidity and tax savings. In this context, ELSS is a clear choice for investors who have a higher risk appetite. Especially if one is in the early and middle phase of one’s career, investing in ELSS is a good way to create wealth over the long term. Tax saver FDs make sense for those who have a low risk appetite, especially those nearing retirement or post retirement for whom security of capital is a priority. Even when we do a ELSS vs PPF vs FD comparison, ELSS stands out because of its potential of higher returns.

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