Under the law of the Income Tax Act, Section 80C, it is possible for an Indian citizen to claim tax benefits on certain investments and expenditures. But of course, each of these options comes with its own shares of risks, benefits and returns.
What are ELSS Funds?
ELSS is also known as Equity Linked Savings Scheme and out of all the mutual fund investment options; this is the only one which is eligible for a tax reduction under Section 80C. This tax deduction can go up to a limit of 1.5 Lakhs INR annually. The ELSS is a diversified form of mutual funds.
But, it was always not this way. Previously, the ELSS returns were completely tax free. However, after a budget meeting in the fiscal year 2018, it was stated that the long term capital profits of more than 1 Lakh INR would be eligible for a 10 percent tax. And more, the investor involved will not be getting the benefit of indexation.
Also Read: 5 mistakes to avoid while investing in ELSS funds
On the contrary, even after the law of the 10 percent tax deduction, the ELSS funds definitely have the capacity to deliver much superior return benefits as compared to other tax-saving options and investments.
Due to the compound interest, it locks in your investment, making sure that your investment is doubled if you invest for a duration of 5 years (which is the duration of a tax saving Fixed Deposit). In addition, the minimum duration of the lock in period is 3 years.
What does Tax Saving Fixed Deposits mean?
If you, as a customer, are investing in Fixed Deposit in banks, you are then eligible to claim a tax deduction of up to 1.5 Lakhs INR per financial year.
These Fixed Deposit options have a lock in duration of a minimum of 5 years and it is not possible to withdraw the amount prematurely. It is possible, however, to ask for loans against your Fixed Deposit at competitive rates. But, it is important to know that the interest that is earned on these Fixed Deposits, is taxable according to the tax bracket category of the customer.
How are ELSS Funds different from Tax Saving Fixed Deposits?
| Parameter | ELSS | Tax Saving Fixed Deposit |
| Liquidity | Possible to withdraw the amount or exit the investment after 3 years | Possible only after 5 years duration |
| Lock in Period | 3 years | 5 years |
| Online Option | Either through lump sum or SIP | Not possible online |
Not possible to withdraw the amount of the Tax Saving Fixed Deposit before the lock in period of 5 years.
The Bottom Line
Before investing in either of the alternates, it is mandatory to weigh on a variety of factors such as the lock in period, age and duration of investment as well as the risks involved.
Also Read: SIP and ELSS – A winning combination
Typically, all those customers who prefer the double benefit of wealth accumulation and tax benefit usually go for ELSS; whereas, those who prefer low risk and guaranteed returns prefer Tax Saving Fixed Deposit.
