Difference between ELSS vs FD

As you earn money to safeguard your financial well-being, it is equally important to invest it. Investments allow you to reap benefits in the short- to long-term, protecting it from erosion due to inflation. 

Broadly speaking, you usually have the choice between two types of investments. Your first option are market-linked investment avenues that have higher risks, but offer high returns. On the other hand, you have safe investments and the returns you get are usually lesser than market-linked schemes.

An example of two such options are the FD and Equity Linked Saving Schemes (ELSS). These investment tools offer the benefit of growing your wealth, but do so through different mechanisms. 

Let’s take a closer look at the ELSS vs FD debate.

Here are a few key differences you must know while exploring FD vs ELSS.

Equity Linked Savings Scheme or ELSS is a type of mutual fund investment that offers dual benefits of wealth generation and tax savings. ELSS funds are the only category under mutual funds where you can claim tax exemptions on your returns.   

These funds fall under the equity category (open-ended), which means that more than 65% of the money is invested in equity. 

One can save taxes up to ₹1.5 Lakhs under Section 80C of the Income Tax Act. You can choose to invest in either the growth option or the 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 and dividend payout. The former means the dividend is reinvested, and the latter is paid out by the fund at specified periods of time. The dividend paid out is also taxed.

The following are some of the key features of the ELSS funds:

• ELSS funds come with a lock-in period of 3 years

• After the lock-in period, 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, with the latter generally considered better

• Even if you are new to investing, you need not be wary of ELSS funds as the fund manager who manages your investment

• There is no maximum limit for investment in ELSS 

• Even if you invest over and above the tax exemption limit, you will get deductions only up to ₹1.5 Lakhs as specified under Section 80C 

The Union Budget of 2018, proposed to levy a 10% long-term capital gain (LTCG) on returns of over ₹1 Lakh on the ELSS scheme. The proposal came into effect on April 1 of that year. Prior to this, returns under the ELSS enjoyed a complete tax rebate. 

Historically, ELSS funds have provided higher returns as compared to other traditional investment avenues. On average, these schemes have offered 12%-16% returns in the last 5 years, with some even providing returns of over 20% in 5 years.

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.

An FD a Fixed Deposit allows you to invest a fixed sum for a certain period of time and correspondingly earn interest on it.

You can open an FD with either a bank or a non-banking financial institution as well whichever offers attractive interest rates. Since the money invested in fixed deposits is free from market fluctuations, they have been quite popular as a saving option.

You can also invest in a tax-saving FD on Bajaj Markets and grow your savings steadily. In this FD, you get a tax deduction under Section 80C of the Income Tax Act of 1961. Under this provision, you can claim a deduction of a maximum of ₹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.

The ELSS vs Tax-saver FD debate is a long-standing one. Hence, here’s a breakdown of how taxes work in both cases. As per Section 80C of the Income Tax Act of 1961, tax-saving FDs and ELSS can be your conduits to tax benefits. 

You must, however, keep in mind that the returns you earn through these investments are taxed separately. Tax-saving FDs aren’t as efficient when it comes to tax benefits as ELSS investments are. 

The long-term monetary gains of up to ₹1 Lakh are tax-exempt on ELSS. This makes ELSS a preferred investment option for those falling under higher income tax brackets. If you come under a higher tax bracket, an ELSS can prove to be very useful for you since. 

All mutual-fund dividends are clubbed with your overall income and tax you on the basis of your income slab.  

Be it ELSS or an FD, making an investment is always a good decision. This not only helps you build your corpus for your future, but also helps you secure your present. 

As for the tax-saving FD vs ELSS argument, choosing either ELSS or FD as an investment you prefer depends completely on your risk appetite and financial goals. However, both bring you amazing returns and tax benefits. 

Both of these investment avenues also come with the advantages of lower risk or higher return margins. Either way, be it mutual funds or fixed deposits, you can always rely on Bajaj Markets to offer you the industry’s best options.