Section 80c of the Indian Income Tax Act offers us the freedom to save money in tax while generating high returns on the invested amount.
Yes, according to the Section 80c tax exemptions, you will find a list of fund types like – PPF, Fixed Deposits, and ELSS etc. Which does not just help you save a substantial amount in taxes but also helps you generate high returns.
While, we have already covered the differentiating factors between ELSS and PPF and established that ELSS are a much better mode of investment, in this article we are going to look into what separates ELSS from FD.
Without further delay, let us get into what each of the two tax saving investment models entails.
What is FD?
Investing in Fixed Deposits through banks allow both HUFs and Individuals to ask for a deduction of around Rs. 1,50,000 in a financial year. The deposits come with a lock-in period of 5 years, without giving you an option to take out the invested amount out prematurely. However, it does give you the option to avail loan at the back of them.
Now, while the investment itself is tax exempted, the interest that you earn on them is taxable.
What is ELSS?
Out of the complete Mutual Fund market, it is only the ELSS investments that comes with the benefit of tax exemption under Section 80c. It is a diversified mutual fund based on equity investment that gives deductions of over Rs. 1.5 Lakhs on an yearly mode.
Before the Budget 2018 announcement, ELSS returns were 100% tax free, but now investors would have to pay 10% long-term tax if the gains are more than Rs. 1 Lakh in an year. But, even with the 10% tax deduction, ELSS comes with the potential to give greater returns as compared to any other form of tax saving investment modes available today.
Now that we have looked at what both FD and ELSS investment means, it is time to look into the factors that differentiates them and try to establish which mode of tax saving investment is better than the other.
ELSS vs FD – Factors of Differentiation
- Rate of Return
In Fixed Deposit, the rate of return is generally fixed by the banks and fall in the range of 6 to 8%.
In case of ELSS, the rate of returns are entirely dependent on how the market performs. So, if the market is high, the rate of returns would be high and if the market is low, the percent of return will be low too. But, generally, the returns on ELSS has been falling in the range of 15-18%.
- Term of Tenure
The Fixed Deposit tenure is 5 years however, you can expand it to over 10 years.
In case of ELSS, the lock-in period or term is 3 years following which you can either invest the amount somewhere or redeem it.
- Tax-Saving Opportunity
The tax that you will have on the returns on your Fixed Deposit depends entirely on the tax slab.
In case of ELSS, the amount of tax that is charged is 10% LTCG tax on the profit that you make over Rs. 1 Lakh.
- Associated Risks
The amount of risks associated with Fixed Deposit are low to none as they are safeguarded by the banks offering them.
In case of ELSS, it is the market that manage your funds and as you know that market is very volatile, the investment automatically comes with a lot of attached risk as well.
- Option to Start Online
Not many banks gives you the facility to open a fixed deposits account online.
ELSS can be opened online without you having to visit any bank or fund house.
- Factor of Liquidity
Fixed Deposits does not allow you to withdraw any amount before 5 years of the lock-in period.
ELSS gives you the facility to withdraw the invested amount after 3 years.
Now that we have looked at both the mode of tax saving investments and what separates them from one another, it is time to look into when to choose when.
Well, the answer to it depends entirely on you. If you are someone who is okay with taking risks if it amounts to high returns, go with ELSS. But, if you are someone who prefers ease above all, go with the Fixed Deposits mode of Section 80c tax saving investment.
If you are confused about which should you go for, get in touch with our mutual funds experts today!