Investing is a crucial aspect of financial planning, and individuals often find themselves weighing the pros and cons of various investment options. Fixed Deposits (FD) and Equity Linked Savings Schemes (ELSS) are two popular choices, each offering distinct features and benefits.

 

In this article, we will delve into the characteristics of FD vs. ELSS to help investors make informed decisions based on their financial goals and risk tolerance.

Difference Between ELSS vs Fixed Deposit

Here are a few key differences you must know while exploring fixed deposit vs..

Parameter

Fixed Deposit

ELSS

Risk

Low-risk investment

Exposed to market fluctuations, resulting in higher risk

Return Profile

Offer a fixed interest rate over a predetermined period

Potential for higher returns as they invest primarily in equities and related instruments

Lock-in Period

  • 7 days to 10 years for regular FDs

  • 5 years for tax-saver FDs

Three years

Tax Implications

  • Taxable as per the investor’s income slab

  • Investments Tax-saver FDs eligible for deductions up to ₹1.50 Lakhs under Section 80C of the IT Act

  • Under Section 80C of the Income Tax Act, tax benefits of up to ₹1.50 Lakhs annually

  • Long-term capital gains are tax-free up to a certain limit 

Hedge against Inflation

  • Provide capital protection

  • The returns may not always outpace inflation, impacting purchasing power

  • Allows for capital appreciation

  • Potential to beat inflation over the long-term

Loan/overdraft facility

Available on regular FDs

Not available

Taxability of ELSS and FD

The taxability of ELSS and FD differs in terms of how returns are treated. Let's explore the tax implications of both:

1. ELSS

  • Short-term capital gains (STCG) (if units are held for less than a year) are taxed at the applicable STCG tax rate, which is the same as the investor’s income slab rate

  • LTCG (if units are held for one year or more) up to ₹1 Lakh are exempt, and any gains above that are taxed at the rate of 10%

  • Investments up to a maximum limit of ₹1.50 Lakhs in a financial year qualify for deduction u/s 80C of the IT Act

2. Fixed Deposits

  • Interest earned is considered income, and is taxable as per the investors tax slab

  • Tax-saver FDs offer deductions of up to ₹1.50 Lakhs under Section 80C of the Income Tax Act

 

All mutual-fund dividends are clubbed with your overall income and you get taxed based on your income slab.

 

Choosing between fixed deposits and ELSS depends on an investor's risk tolerance, investment horizon, and financial goals. FDs offer stability and capital protection but may provide lower returns. ELSS, while subject to market volatility, has the potential for higher returns and greater liquidity. Investors should carefully assess their preferences, and align their choice with their overall investment strategy and tax planning needs.

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Disclaimer

The information provided by BFDL herein above is related to the Non-Partnered Banks/ NBFCs and is just for the purpose of information and under no circumstances the information provided hereinabove is intended to be source of advice or recommending any financial investment advice or endorsement of any sort. 

The information including interest rates with regard to fixed deposit, provided on this website is gathered through publicly available sources over the internet and is considered as accurate and reliable to the best of our knowledge. BFDL disclaims any responsibility or liability regarding inaccuracies, omissions, mistakes etc. as well as offers by the Non-Partnered Banks. The use of information set out is entirely at the User’s own risk and User should exercise due care prior taking of any decision, on the basis of information mentioned hereinabove. You are advised to visit/ contact the respective Banks/ NBFCs to verify the information before making any investment or opening an account. Further, BFDL does not undertake any responsibility or liability to update this information. YOU ARE SOLELY RESPONSIBLE FOR ANY LIABILITY OR DAMAGE YOU INCUR THROUGH ACCESS TO OR USE OF THE SITE OR SUCH INFORMATION OR MATERIALS EXCEPT WHERE THE LAWS AND REGULATIONS OF A PARTICULAR JURISDICTION CONCERNING WARRANTIES CANNOT BE WAIVED. Additionally, display of any trademarks, tradenames, logo and other subject matters of intellectual property owners. Display of such Intellectual Property along with the related product information does not imply BFDL’s partnership with the owner of the Intellectual Property of such products. 

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FAQs

Returns on FDs are fixed and lower compared to the potentially higher returns offered by ELSS, which are linked to the performance of the equity market.

FDs, especially Tax-Saving FDs, offer deductions under Section 80C of the Income Tax Act. ELSS also qualifies for Section 80C deductions, making it a popular tax-saving option with the added potential for higher returns.

FDs are considered low-risk with capital protection, while ELSS involves market risk. ELSS returns can be volatile as they depend on the performance of the equity market.

FDs may have penalties for premature withdrawals. ELSS has a lock-in period of three years, during which redemption is not allowed. After three years, ELSS units can be redeemed without any exit load.

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