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ELSS vs Fixed Deposit (FD): What to Choose?
Posted on Thursday, September 26th, 2024 | By IndusInd Bank
Confused between the Equity Linked Savings Scheme (ELSS) and Fixed Deposits (FDs)? Choosing the right investment can be a difficult task, especially when you are weighing options like ELSS, with its higher growth potential and tax benefits, against the safety and predictability of FDs. This choice is critical, as it impacts both your financial strategy and peace of mind.
This ELSS vs FD blog will explore both options in detail. Know the key differences, advantages, and considerations of ELSS and FDs to make an informed investment decision.
What are Fixed Deposits?
FDs are one of the most traditional and safest investment options offered by banks. When you open a fixed deposit account, you deposit a lump sum of money for a specific period at an agreed-upon interest rate. Upon maturity, you receive your principal amount along with the accrued interest.
Key Features and Benefits of Fixed Deposits
| Safety and security | Deposits up to ₹5 lakh per bank account are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the Reserve Bank of India (RBI). |
| Taxation | Interest earned is taxable according to the investor’s income tax slab rates. |
| Flexible tenure | The FD tenure can range from seven days to 10 years. |
| Immediate liquidity | Though some penalties may apply, you can generally withdraw from an FD at any time. |
| Risks | Minimal to zero risk as FD rates are not influenced by market fluctuations. |
Also Read: How to Calculate Fixed Deposit Returns A Simple Guide
What is an Equity Linked Savings Scheme?
ELSS is a type of mutual fund investment that primarily invests in equities and equity-related instruments. ELSS funds are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. This gives investors dual benefits, i.e., the potential for higher returns linked to market performance and tax savings.
Key Features and Benefits of ELSS
| Higher return potential | ELSS funds primarily invest in equities and are market-linked. Hence, they offer the potential for higher returns over time. Note that the returns are not fixed and can fluctuate based on market performance. |
| Minimum lock-in period | ELSS funds come with a minimum lock-in period of three years. This is the shortest among other tax-saving investments under the 80C basket. |
| Taxation | After a tenure of three years, the earnings from this scheme will be categorised as Long-Term Capital Gains (LTCG) and are subject to a 12.5% tax for amounts over ₹1.25 lakh. |
| Risk | Equity and equity-linked securities can be highly volatile over the short term. Thus, maintaining a long-term approach with these investments is often recommended. |
FD vs. ELSS: Tax Implications Compared
Looking at tax-saving options? Both Fixed Deposits (FDs) and Equity-Linked Savings Schemes (ELSS) fall under Section 80C of the Income Tax Act. But when it comes to how they’re taxed, the differences really stand out.
1. Tax Deduction on Investment Amount
- FD: You can claim up to ₹1,50,000 per year under Section 80C by investing in a 5-year tax-saving FD.
- ELSS: Investments in ELSS mutual funds also qualify for Section 80C deductions, up to the same ₹1,50,000 limit annually.
2. Taxation on Returns
- FD: The interest earned from an FD is added to your total income and taxed according to your slab rate. So, while the investment amount may be eligible for tax deduction, the interest itself isn’t tax-free. Banks may also deduct TDS if your interest income crosses a certain threshold.
- ELSS: Returns from ELSS are treated as long-term capital gains (LTCG). Currently, gains over ₹1,25,000 in a financial year are taxed at 12.5%. Gains up to ₹1,25,000 are tax-exempt.
Summary of Tax Treatment
FDs offer guaranteed returns, but the interest is fully taxable. ELSS, on the other hand, comes with market-linked returns and a different tax structure—some of the gains can be tax-free, depending on the total amount.
These differences in tax treatment are worth keeping in mind while exploring tax-saving avenues under Section 80C.
ELSS vs Fixed Deposit | What to Choose?
While the opportunity for higher returns is an attractive part of ELSS, it comes with higher risks due to market volatility. It requires investors to have a higher risk tolerance and a longer investment horizon to buffer against market fluctuations. Also, the final returns will be directly affected by the quality of the funds selected and how well they perform.
However, if stability and predictable outcomes are priorities in your investment strategy, FDs could be more suitable. Most importantly, choose IndusInd Bank Fixed Deposits to enjoy high interest rates and premium features like:
- A 100% digital process to open a fixed deposit account (just provide your Aadhaar and PAN card details)
- The auto-renewal option allows your FD investments to grow uninterruptedly
- Leverage video KYC to book an FD with a flexible amount
- Reduce your tax liabilities by booking a five-year tax-saver FD
- Multiple options for interest payments (monthly, quarterly, half-yearly, etc.).
To sum up
Deciding between an ELSS and an FD depends on various factors, including your risk appetite, investment duration, liquidity needs, and tax implications. ELSS may appeal to aggressive investors who aim for higher returns through equity exposure and want tax benefits. FDs are ideal for investors who need secure returns and quick liquidity without risks.
Note that while FDs have many benefits, choosing a reliable bank for your hard-earned money is equally important. Consider IndusInd Bank Fixed Deposits, which give your savings a boost with competitive rates and flexible terms. Don’t wait to secure your finances! Apply Now.
Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.
