ELSS vs FD: Making the Right Choice | Investment Comparison

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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.

Fixed Deposit and Other Investment Comparisons
Bonds Vs FD	FD Vs RD	NPS Vs FD
Certificate Of Deposit Vs Fixed Deposit	FD Vs Real Estate	PPF Vs FD
Corporate FD Vs Bank FD	Fixed Deposit Vs Life Insurance	Short Term FD Vs Long Term FD
Cumulative Vs Non Cumulative FD	Fixed Deposit Vs Savings Account	SIP Vs FD
Debt Funds Vs FD	Liquid Fund Vs FD	Sukanya Samriddhi Yojana Vs FD
Equity Vs Fixed Deposit	MIS Vs FD	Time Deposit Vs Fixed Deposit
FD Vs NSC

Disclaimer

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Which investment option provides better returns: FDs or ELSS?

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.

Can I use FDs and ELSS for tax-saving purposes?

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.

How does risk and volatility differ between FDs and ELSS?

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.

Can I withdraw money before maturity in FDs and ELSS?

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.