Section 80C of the Indian Income Tax Act allows you to claim tax breaks on certain expenses and investments. The provisions of Section 80C allow for annual tax deductions of up to Rs.1.5 lakh on ELSS funds and tax-saving FDs, among other investment options. Both these financial instruments have their own set of goals, risks, and benefits.
What are ELSS Funds?
The only mutual fund that qualifies for Section 80C deductions is the equity-linked savings scheme or ELSS. The ELSS fund is an equity mutual fund that offers annual tax savings of up to Rs.1.5 lakh.
Previously, ELSS returns were tax-free. Following the 2018 Budget, long-term capital gains tax on gains over Rs.1 lakh is now payable at 10%. Even after the 10% tax cut, ELSS may outperform other tax-saving options in terms of returns. The benefits of ELSS investment extend beyond tax savings. If you invest for five years and above, the power of compounding ensures that your money generates healthy returns. Furthermore, the minimum lock-in period is merely three years.
What is a Tax Saving Fixed Deposit?
Individuals and Hindu Undivided Families can claim a tax deduction of up to Rs.1,50,000 every fiscal year by investing in tax saving fixed deposits. These deposits are locked in for five years. This deposit, on the other hand, cannot be withdrawn early. However, you can borrow against your FDs, which is a plus point. However, the interest earned on these deposits is taxable according to the individual's tax bracket.
ELSS vs. Tax-Free FD: Head to Head
The table below provides an overview of both investment vehicles based on many parameters:
|
Particular |
ELSS |
FD |
|
Definition |
It is a type of mutual fund that primarily invests in equities and equity-related schemes. |
An FD is a traditional investment vehicle in which you can deposit a lump sum with any bank. |
|
Taxation |
The interest earned over a lakh is subject to a 10% LTCG tax. |
The tax would be levied in accordance with the individual’s tax slab. |
|
Returns |
It is subject to the risks associated with the stock market. However, over the last five years, it has generated good returns. |
The bank determines the interest rate, which ranges from 6% to 7.5%. |
|
Tenure |
There is a three-year lock-in period, following which you can redeem or reinvest. |
The tenure is five years minimum, although it can be extended to ten years. |
|
Potential Risks |
Because of their equity exposure, ELSS funds are riskier, although they have historically produced strong returns. |
It safeguards your funds and is just as secure as a traditional savings account. |
|
Online Availability |
An ELSS can be initiated online as a one-time payment or in installments. |
Some banks may not allow you to open an FD account online. |
|
Liquidity |
You can leave or withdraw from ELSS after three years. |
You can't withdraw your money from a tax-saving FD for five years. |
|
Applicability |
ELSS funds are better suited to investors who are willing to face certain financial risks. |
Fixed deposits are best suited to conservative investors. |
|
Credit Facility |
ELSS funds cannot be utilized as loan collateral. |
FDs can be used as collateral for an overdraft or loan. |
Should you invest in ELSS or tax-free fixed deposits?
Before embarking on new financial initiatives, consider your age, investment horizon, and risk tolerance. ELSS should be preferred by those seeking the twin benefits of wealth building and tax benefits. Long-term investors with a higher risk tolerance may find tax saver mutual funds to be a viable alternative. People nearing retirement might consider investing in tax-free FDs, which have low risks and assured returns.
In short, you should always select an investment strategy depending on your financial objectives and risk tolerance. As mutual funds are subject to market risks, you should read the scheme-related documents carefully.
Mutual fund investments are subject to market risk, please read the scheme-related documents carefully.
