FD vs ELSS

We live in uncertain times. As we earn money to safeguard our wellbeing, it is equally important to invest in it right, so we can reap benefits in the future. While some investments promise higher returns, they come with higher risks as well. However, a few saving avenues not only offer attractive returns but also make your investments eligible for tax deductions under Section 80C of the Income Tax Act, 1961. Tax saving FDs and Equity Linked Saving Schemes(ELSS), both fall under this category, and offer the double benefit of growing your wealth as well as helping you save tax. Lets us take a look.

What is ELSS?

 

Equity Linked Savings Scheme or ELSS is a category of mutual funds that offer capital appreciation and at the same time give you the benefit of tax exemption. These funds fall under the equity category( open-ended), which means that more than 65% % of the money is invested in equity. Out of all the mutual funds currently available in India, it is only the ELSS funds which are eligible for tax deductions.

One can save taxes up to Rs 1.5 lakhs under Section 80C of the Income Tax Act. You can choose to invest in either the growth option or dividend option. In the growth option, money is reinvested and keeps on growing until the time you redeem it. The dividend option is further sub-divided into dividend reinvestment which means the dividend is reinvested, and dividend payout, which means it is paid out by the fund at specified periods of time. Dividend paid out is also taxed.

 

Key features of ELSS

 

  • ELSS funds come with a lock-in period of 3 years, after which you can either redeem all the amount or reinvest all or a part of it as per your needs.
  • The portfolio in which the money is invested is transparently available to all investors by the respective fund.
  • You can choose to invest either a lump sum amount or through a systematic investment plan or SIP. Generally, SIPs are considered better.
  • Even if you are new to investing, you need not be wary of ELSS funds. After you invest money, it is the fund manager who manages your investment.
  • There is no maximum limit for investment in ELSS. However, even if you invest over and above the tax exemption limit, you will get deductions only up to Rs 1.5 lakh as specified under Section 80c of the Income Tax Act.

 

A few things to keep in mind

 

ELSS funds were completely tax-free before 2018. However, post the budget of 2018, gains from ELSS have been classified under long term capital gains. And hence, returns in excess of Rs 1 lakh are levied with the long term capital gains tax and are taxed at 10%.

However, even after the 10% tax cut, ELSS has potentially delivered better returns than other tax saving instruments. Historically speaking, in the past 5 years, it has delivered returns of 14 to 16%. Although its equity exposure makes it risky, the power of compounding ensures that your money is doubled, provided you invest for say 5 years or more.

 

What is an FD?

 

When you invest a fixed amount of money for a certain period of time and correspondingly earn interest on it, it is referred to as a Fixed Deposit or FD. You can open an FD with either a bank or non- banking financial institutions as well which offer attractive interest rates. Since the money invested in fixed deposits is free from market fluctuations, they have been quite popular as a saving option.

 

Types of FD

 

Fixed deposit can be of two types depending on the interest payout mechanism. In a non-cumulative FD, the principal amount is invested for a fixed tenure and the interest is paid out on a monthly, quarterly or annual basis as per your instructions. This traditional plan is suitable for those looking for a regular income at fixed intervals such as senior citizens. A cumulative FD on the other hand also invests your principal amount for the tenure of your choice, but here it is compounded quarterly and then reinvested alongside your principal.

You can invest in either of these on Finserv MARKETS for a duration ranging from 6 months to 5 years. The longer the time period that you stay invested for, the higher the interest rate. While senior citizens get an interest rate of 0.35% over and above the prevailing interest rates, if you renew your deposit, you get an interest rate of 0.10% over and above your preceding deposit on your next FD.

 

Tax-saving FD

 

You can also invest in a tax-saving FD on Finserv MARKETS and grow your savings by more than 49%. In this FD, unlike the ones above, you get a tax deduction under Section 80C of the Income Tax Act, 1961 wherein you can claim a deduction of a maximum of Rs 1.5 lakhs. These FDs come with a lock-in period of 5 years. However, the interest is taxable and no partial or premature withdrawal is allowed.

 

Key features of tax-saving FDs

 

  • The interest rate is decided by the bank or non-banking financial institution as per the prevailing interest rate.
  • You cannot make a withdrawal before the lock-in period of 5 years.
  • The interest earned is added to your income and you are taxed as per the tax slab you fall into.
  • A tax-saving FD ensures capital protection and is as safe as a regular FD
  • It is a low risk, guaranteed return option for risk-averse investors, as well as for those looking to park their money in a relatively safer avenue
  • It does not protect you from inflation, in case the rate of inflation is higher than the rate of interest of the tax-saving FD

Both tax-saving FD and ELSS are good options for those who want to avoid market fluctuations and yet grow their wealth. They can help you ladder your investment to ensure a steady income in the future. Even if you are a high-risk investor, these two are a good option to park a portion of your funds.

Your age, investment horizon and risk appetite are key drivers to help you decide where and how much you want to invest across different options available. While Equity-linked savings schemes might be a good option for those who are still working, a retired individual might prefer the safety and low risk of a tax saving FD. So take stock of your financial goals and judiciously choose a savings plan that helps you add value to your money in the long run.

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