ELSS vs Tax Saving FDs: Which One is Better?

When it comes to tax planning, both ELSS and Tax Saving FDs are popular options among the investors. Not only they are good at tax-saving but are also good investment instrument.

Both continue to attract a lot of investors due to their unique features over other tax saver instruments. This also brings to a question, which one is a better option, as both offer similar tax benefits.

Despite being similar in nature, they are not suitable for every kind of investors. They both have different fundamental structure and each helps a different kind of investors.

Now, let’s understand the basic difference between ELSS and Tax Saving FDs.

ParametresELSSTax Saving FDs
Issued ByMutual Fund HousesBanks
Who can InvestAll Indian citizens are eligibleAll Indian citizens are eligible
Lock-In Period3 years5 years
ReturnsReturns depend on the market performanceGuranteed Returns (prevailing interest rate for 5 years FD gets locked in)
Investment RiskHigh-Risk Investment ProductNo Risk
Tax on ReturnsReturns up to Rs 1 Lakh are not taxable
Returns above Rs 1 Lakh are subject to LTCG tax of 10%
Interest income is taxable as per the income tax slab rate you fall into
Loan/Overdraft FacilityLoan and Overdraft facility cannot be availedLoan and Overdraft facility cannot be availed against these FDs.
Only available against regular FDs
RedemptionCan be redeemed after 3 year lock-in period, but can continue with the investment Can be redeemed after 5 years, and if not redeemed, will get converted into regular FD
Investment ModeLump Sum and SIP mode available for investingLump sum (at once)
Minimum & Maximum InvestmentMinimum - Rs 500
Maximum- No Limit
Minimum- Varies from bank to bank
Maximum- Rs 1.5 Lakh

Who Should Buy Which One?

By going through the comparison chart, you can easily finalise your ideal tax-saver instrument.

Since ELSS funds invest in equity stocks and equity-related securities, the fund is suitable for investors with a high-risk appetite. The fund can get extremely volatile in the short term, and can even give you negative returns. But, investing for a long term period (5 years & above), it has the potential to generate higher returns or beat the returns of other tax saving instruments by a huge margin.

Further, ELSS funds allow to spread out your investment and create a well-diversified investment portfolio.

In the case of Tax Saving FDs, it is suitable for investors with a low-risk profile, especially those nearing retirement or post-retirement, who cannot risk their capital.

As the returns are guaranteed, the investors don’t have to bother about the market condition. The only disadvantage is, the interest income is taxable as per your income tax slab rate.

Therefore, ELSS stands out because of its higher return potential. And, Tax Saving FD stands out for its safety and guaranteed returns.

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