ELSS Fund or FD- Which tax-saving option is better?


FD or ELSS – Since life is so unpredictable, it is important to invest money carefully now so that we can enjoy the benefits later. Despite the fact that certain investments offer huge returns, they also pose greater risks. The Income Tax Act of 1961’s Section 80C permits certain saving strategies to qualify your assets for tax deductions in addition to offering good returns. In this category are equity-linked savings schemes (ELSS), which have the added benefit of helping to reduce taxes, as well as tax-saving fixed-rate deposits (FDs). First, let’s analyze it.


Only ELSS is a mutual fund that qualifies for 80C deductions. It is a diversified equity mutual fund that gives Section 80C tax deductions of up to Rs. 1.5 lakh per year (IT Act 1961). ELSS returns were entirely tax-free prior to the passage of the February 2018 Budget.

However, if your capital gains reach Rs. 1 lakh after a year, you will now be liable for a 10% long-term capital gains tax. ELSS has the ability to provide better returns than other tax-saving investments even after the 10% tax cut. Tax savings are just one benefit of ELSS investing. If you invest for, say, five years, the power of compounding ensures that your money will double (tenure of tax-saving FD). Furthermore, there is a 3-year minimum lock-in time.

Either the growth option or the dividend option is available for investment. When you choose the growth option, your money is reinvested and grows until you decide to redeem it. The dividend option is further separated into dividend payout and dividend reinvestment, which refers to how the dividend is paid out by the fund at predetermined intervals. Taxes are owed on dividend income as well.

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Fixed Deposits in Banks (FD)

Each individual should have a bank fixed deposit (FD) in their investment portfolio because they are an excellent option for making investments. The main benefit of an FD is that there is virtually no risk involved, and depositors are guaranteed returns.

There are two different kinds of FDs: regular FDs and tax-saving FDs. While the duration for regular FDs spans from 7 days to 10 years, tax-saving term deposits have a lock-in period of up to 5 years.

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The characteristics of ELSS

ELSS are distinct from conventional equity mutual funds due to their lock-period and tax features.

The following are the primary attributes of ELSS funds:

  • Bulk investments with some debt risk in business stocks
  • They have the potential for both dividends and growth
  • Three-year lock-in period.
  • Returns that are related to the market and have a chance of being acceptable
  • In the long run, returns can outpace inflation.
  • Market volatility and risk are present.
  • Investments may be made in lump sums or SIPs.
  • Each SIP unit must be held for three years to be tax-deductible.
  • Section 80C of the Income Tax Act allows for a tax deduction of Rs. 1,50,000 per year.
  • If the total long-term capital gains from equity-oriented mutual funds or equity shares reaches Rs. 1,00,000 in a year, gains from ELSS funds held for more than 12 months are subject to long-term capital gains tax at a rate of 10%.
  • Partial and premature withdrawals are not permitted.

Major characteristics of fixed deposits

Bank deposits that save taxes have the following elements:

  • Debt or fixed-income instrument with a five-year tax-related bank lock-in period
  • Low risk and certain rewards.
  • A monthly, quarterly, half-yearly, annual, or at maturity interest payment plan is possible.
  • Higher interest rates are available to senior citizens.
  • You may deduct up to Rs. 1,50,000 per year in taxes under Section 80C of the Income Tax Act.
  • Interest income will be taxed based on the investor’s income bracket.

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Analysis of ELSS and FD

Here is a comparison between tax-saver FDs, other forms of FDs, and ELSS.

1.The safety of an investment

Compared to ELSS, an FD is a more secure type of investment. A fixed deposit offers guaranteed returns. Your ELSS returns, however, are based on market performance.

2. Low risk tolerance

FDs are suitable for investors with a low risk tolerance. The greatest candidates for ELSS schemes are those who can accept financial risk and desire tax advantages.

3. Here, Loan/Overdraft Service

It allows you to use your fixed deposit as collateral for a loan or overdraft. But ELSS does not offer this choice.

4. Credit Card Processing

You may use your FD account as collateral to apply for loans if you have one.


If you are looking for good returns and have a risk tolerance, I personally think it is a smart idea to invest in ELSS and other mutual funds because they offer better rates of return. But save at least six months’ worth of your salary in regular savings accounts (FDs) so you may access them quickly in an emergency.

However, each person has a different capacity for taking a risk. It is therefore best to decide for yourself.

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By Poonam

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