Certain investments and expenses come with a benefit of tax exemption under the Income Tax Act. For example, under the IT Act, Section 80C, Tax Saving FDs, ELSS and PPF are some of such financial vehicles which come with tax benefits on investments up to Rs. 1.5 Lakh per annum. Let us discuss two of these instruments- ELSS and FD.
ELSS FUNDS (EQUITY LINKED SAVINGS SCHEME FUNDS)
Of the huge variety offered by the mutual fund market, the only type which comes with tax benefits is the ELSS fund scheme. It is an equity-linked mutual fund scheme that comes with tax deduction up to Rs. 1.5 Lacs per year.
Until the year 2018, returns generated from ELSS scheme were tax exempted. With the Budget 2018, capital gains over Rs. 1 lac are taxed at the rate of 10%.
The 10% tax slab does not lower the Scheme’s potential to generate excellent returns as compared to other tax-saving schemes/instruments. Apart from just being a tax-saving tool, ELSS also offers the power of compounding ensuring your money is doubled if you happen to invest for the same time period as an FD (Tax-saving FD). Another important feature of ELSS is that the lock-in period is of just 3 years.
TAX-SAVING FIXED DEPOSITS
FDs are bank deposits for a specified or fixed tenure and at a fixed ROI (Rate of Interest) as per investor’s choice. The tenure can be as short as 7 days and range up to 10 years. Opening an FD with a bank means lending money to the bank for which you get paid with interest. As the interest rate and time period are hence it is called a Fixed Deposit. Investing in tax-saving FDs with banks comes with a tax exemption on up to Rs. 1.5 lac per year. The tax-saving FDs come with a lock-in period of 5 years with no premature withdrawal.
Although the interest earned on this scheme is taxable as per the income tax slab.
KEY FEATURES- ELSS AND FD
1. Most of the principal is invested in equity with a lock-in period of 3 years.
2. ELSS comes with two variants- Growth and Dividend.
3. You can start with any amount but a Maximum of Rs. 1.5 lac comes with tax deductions.
4. The capital gain (dividend income) is totally tax exempted.
5. Being a market-related instrument, they carry the risk factor with them but offer huge returns as well.
TAX-SAVING FIXED DEPOSIT
1. It comes with a lock-in period of 5 years.
2. A maximum investment of Rs. 1.5 lacs per year comes with tax exemptions.
3. A minimum of Rs. 100 and maximum Rs. 1.5 lac is the desirable limit for availing tax exemptions.
4. The rate of interest is fixed being run by the central government.
5. Premature withdrawal is not allowed
WHICH IS THE BETTER OPTION- ELSS OR FD?
The choice totally depends on the investor’s financial goals and risk appetite.
ELSS is a scheme offering huge returns with a long-term investment. It comes with associated risks but there is the advantage of wealth accumulation and tax deductions.
People with lower risk appetite usually nearing retirement go for assured returns scheme like Tax Saving Fixed Deposit.
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