Earning money is equally important as investing it, but it should be the right and suitable avenue for you. Also, it is important to invest in an investment vehicle which safeguards the fund from inflation and other market risks as well as offers the opportunity to reap the benefits of investment. Equity-Linked Savings Schemes (ELSS) and fixed deposits are two excellent options if your investment goals sound similar to the ones just discussed. But, if you are in the dilemma of ELSS vs FD, like many other investors, consider this blog to be your guide to choosing what’s best for you.
Before we get into a more detailed discussion of these two investment vehicles, let’s go through their key differences first. Refer to the following table for their differences:
|Meaning||Type of mutual fund where your principal is invested in equity or equity-linked markets.||Type of banking investment vehicle where your money is parked for a fixed tenure and interest rate.|
|Risks||High to moderate risk||Low to nil risk|
|Return||Returns are not guaranteed and are subject to market risks. However, it has managed to offer returns between 14% and 16% in the last 5 years.||Guaranteed returns as per the fixed rate of interest applicable at the time of opening an FD.|
|Liquidity||Low liquidity and cannot be liquidated before the end of tenure.||Normal FDs can be liquidated at any time, but tax saver FDs cannot be liquidated before 5 years. However, premature withdrawal attracts penalties.|
|Tenure||3 years||Can range anywhere between 7 days and 10 years.|
|Lock-in Period||3 years||For regular FDs the tenure is flexible. However, for tax-saver FDs, the tenure is 5 years.|
|Loan/ Overdraft Facility||Not available||Available for regular FDs but not for tax-saver FDs|
|Taxability of Return||Not taxable||Taxable|
|Credit Card Facility||Not available||Available against regular FDs, but not tax-saver FDs.|
|Online Facility||Mostly available||Not all banks/ financial institutions offer online facilities. Hence, consult with your bank beforehand.|
ELSS or Equity-Linked Savings Scheme is the only variation of mutual fund that offers the dual benefits of wealth building and tax saving. Also, this is the only type where you can claim tax exemptions on the returns.
65% of the assets are invested in equity and equity-related instruments as ELSS is an open-ended mutual fund.
You can choose between the fund types of ‘Growth’ and ‘Dividend’ when investing in ELSS funds. If you choose Growth ELSS, your money will be reinvested and keep on growing until you choose to withdraw it.
On the other hand, in the Dividend option, there are two further subdivisions of dividend pay-out and dividend reinvestment. If you choose dividend reinvestment, the dividend earned will be reinvested. With the other option, the dividend will be paid at periodic intervals and is taxable.
Fixed deposit (FD) is one of the most reliable investment options where you can park your money for a fixed period of time and interest rate. As the fund is unaffected by market fluctuations, it has been a favourite among risk-averse investors.
You can claim a tax deduction of up to ₹1.5 lakh on interest earned from tax-saver FDs under Section 80C of the Income Tax Act. However, it comes with a lock-in period of 5 years, and you cannot have a premature or partial withdrawal during the lock-in period. In case of premature withdrawal, a penalty is applicable.
ELSS and FD have totally different features and benefits. Hence, which is better for you entirely depends upon your preferences and financial goals.
ELSS is the right option for you if you –
- Are willing to take the risk of market fluctuations
- Are comfortable with a 3 years lock period with no partial or premature withdrawal
- Expecting greater returns that depend on market performance
Fixed deposit is the right option for you if you –
- Are you a risk-averse investor?
- Have long-term financial goals or objectives to fulfil
- Expect guaranteed returns at a higher rate of interest than other investment options
- Want to avail a loan against investment, which is not available for tax-saver FD
You should note that while regular FDs do not offer tax benefits, tax-saver FDs offer deductions under Section 80C of the Income Tax Act.
The debate of ELSS vs fixed deposit is a never-ending one. However, when it comes to tax benefits, tax-saver FDs and ELSS share mutual ground.
However, ELSS are more efficient than tax-saver FDs when it comes to tax benefits. Long-term gains of up to ₹1 lakh are tax-free in ELSS. So if you fall under a higher income tax bracket, ELSS might be the better option for you. Mutual fund dividends are taxed together with your overall income and are taxed as per your tax slab.
Before deciding between ELSS vs FD, consider all the factors mentioned in this blog before choosing your option. Both are very popular options among investors and offer tax benefits. If you wish to invest in both, keeping aside any conflict of interest, you should note that they will be taxed separately.