ELSS vs FD: Which Is the Better Investment Option?

When it comes to saving and investing, many people are often confused between choosing Equity Linked Savings Scheme (ELSS) and Fixed Deposits (FDs). Both options are popular among investors in India, especially those who seek low-risk investments or want to save taxes. However, they differ in terms of returns, risk, tax treatment, and lock-in periods. Choosing between ELSS vs FD depends on your financial goals, risk tolerance, and investment horizon. This FD vs ELSS guide breaks down the key differences between them, helping you choose the right investment based on your financial goals.

What Is ELSS?

Equity Linked Savings Scheme (ELSS) is a type of mutual fund that mainly invests in equities and equity-related instruments. It has a mandatory lock-in period of three years—the shortest among all tax-saving investments under Section 80C of the Income Tax Act. ELSS investing is market-linked, so returns vary based on market performance. While this makes it riskier than fixed options, it also offers potential for higher long-term capital gains. ELSS funds are suitable for investors aiming for wealth creation over time. They can also avail tax deductions of up to ₹1.5 lakh per financial year under Section 80C.

What Is FD?

A Fixed Deposit (FD) is a safe way to invest money. You deposit a certain amount with a bank or financial institution for a fixed time and earn interest on it. The interest rate stays the same throughout the period, so you know how much you will get at the end. Some FDs also offer tax benefits if you keep the money locked in for five years. These are called Tax-Saver FDs. They qualify for deductions under Section 80C of the Income Tax Act. FDs are a good option for people who don’t want to take risks. However, the interest you earn from FDs is fully taxable based on your income slab.

ELSS vs FD: A Detailed Comparison

To better understand the FD vs ELSS decision, let’s explore the major differences between the two:

Conclusion

The decision between ELSS vs Fixed Deposit depends on what you prioritise—growth or safety. If you want higher returns and are comfortable with some risk, ELSS could be a better option. It not only helps in tax saving but also gives you the chance to grow your money through equity markets. On the other hand, if you prefer safety and fixed returns, a tax-saving FD is a good choice. If you are ready to explore smarter ways to grow your money, start your journey with Torus Digital today!

Frequently Asked Questions (FAQs)

• Is ELSS as effective as FD for saving tax under Section 80C?

ELSS and specific FDs are eligible for Section 80C deductions, with a limit of ₹1.5 lakh per financial year.

• What are the tax rules for ELSS compared to FD?

ELSS returns above ₹1.25 lakh are taxed at 12.5% as long-term capital gains, while FD interest is fully taxable as per your income slab.

• Is early withdrawal allowed in ELSS compared to FD?

No. ELSS has a strict three-year lock-in period. Premature withdrawals are not allowed. Regular FDs allow premature withdrawal but with a penalty on interest. Tax-saver FDs have a lock-in period of five years.

• In terms of returns, which is better—FD vs ELSS?

FDs offer fixed interest, usually between 6% and 7.5%, whereas ELSS returns are market-linked and can be higher over the long term, but are not guaranteed.

• How do I check the returns from ELSS and FD before investing?

Use an FD calculator for fixed returns. For ELSS, mutual fund calculators can estimate returns based on past performance and assumed market growth.