ELSS vs FD What works best for you

  • Deposit
  • 1 Months ago

Written by - Shriram

A Fixed Deposit (FD) is an investment option where people can deposit a certain amount for a fixed term and get back the amount with interest upon maturity. An Equity Linked Saving Schemes (ELSS) is a tax-saving investment through which you can claim a tax rebate of up to Rs.1,50,000 per year.

With Shriram Finance tax-saving FD can help you achieve your investment goals with one of the best interest rates available. Apart from saving taxes, you can also avail many other benefits a fixed deposit has to offer. We will read more on the advantages of a fixed deposit in this article.

It becomes increasingly difficult to decide where to invest our hard earned money. While some investment options offer higher returns, they come with higher risks. Some attractive investment avenues provide significant returns and make your investment eligible for tax deductions. Tax saving FD and ELSS are both options that can double the benefits of growing your wealth and help you save tax.

What is an ELSS Fund?

Amongst all mutual fund categories, ELSS is the only fund covered under the Section 80C tax deductions. It is a diversified equity mutual fund that offers tax deductions. ELSS returns were tax-free before the Budget 2018 however, now long term capital that gains tax over Rs. 1 lakh is taxable at 10%.

An ELSS fund still has the potential to deliver superior returns compared to other tax-saving schemes. The perks of ELSS investments are not limited to the taxes saved, but also the power of compounding ensures that it doubles your investment. The minimum lock-in period for such an investment is only three years. An ELSS is different from other equity mutual funds because of its tax feature and the lock-in period.

Key Features of an ELSS Fund:

  • ELSS funds have a comparatively shorter lock-in period.
  • A maximum amount of Rs. 1.5 Lakhs can be claimed for a tax deduction.
  • Investors can choose a dividend payment ELSS fund, allowing them to get returns during the lock-in period.
  • All ELSS fund schemes are eligible for tax exemption under Section 80C of the Income Tax Act in India.
  • Premature and partial withdrawals are not allowed.
  • There is a high potential to get great returns, but there is an element of risk because your returns will be affected if the equity fund does not perform well. 

What is a Tax-saving FD?

Since the money in a fixed deposit is free from market fluctuations, they are quite a popular saving option. Investing in a fixed deposit with banks or Non-Banking Financial Companies (NBFCs) allows people to claim tax deductions.

An FD has a lock-in period of five years if you want to claim tax deductions. However, the interest earned on these deposits is taxable as per the tax bracket of the person investing. A tax-saving FD can be availed at public or private institutions, or NBFCs. Post offices also offer tax-saving deposit schemes with a maturity period of five years at varied interest rates.

Key Features of an FD:

  • Popularly, there are two types of FDs: Tax saver fixed deposit comes with a lock-in period of up to 5 years, while the tenure for regular FDs ranges from 7 days to 10 years.
  • With a tax-saving FD, you can claim a deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. In comparison, a regular FD does not provide tax benefits.
  • A fixed deposit has interest payout options, i.e. the interest amount will be credited to your registered bank account at regular intervals or after maturity. 
  • Every senior citizen is eligible to get a higher interest rate on term deposits.  
  • Premature withdrawal is available for a regular FD, but this facility is not available for tax saver FD. 
  • You can avail of a loan or overdraft against a regular FD but not a tax-saving FD.

Will an FD or an ELSS be best for you?

Parameter ELSS FD
Returns It depends on the performance of the equity fund invested Guaranteed returns; The bank/NBFC decides the interest rate
Tenure Three years Minimum: 7 days
Maximum: 10 years
Lock-in Period Three years
  • For tax saver FD, the period is five years
  • For regular FD, tenure is flexible
Online Facility Available Available
Liquidity You may exit or withdraw after three years.
  • For tax saver FD, the period is five years
  • For regular FD, it can be liquidated at anytime
Risk Moderate-High Low


Will an FD or an ELSS be best for you?

An ELSS fund may provide a higher interest rate but you have to consider the risk factor. An FD may have comparatively lower interest rates but on maturity, you will definitely get your principal amount with the interest. It is not only easy to start an STFC FD but you can also add on features like auto-renewal or auto-withdrawal before starting the deposit.