Fixed deposits are safe but give low returns. ELSS, instead, is highly tax-efficient, but bets on the markets
Many who have ignored tax planning all year long will now be panicking and looking for quick-fix tax-saving solutions. Let’s say you’re adequately insured. You have life and health insurance. You’re not feeling strongly either about small savings schemes like PPF, NSC and KVP. You’d rather find an option from the comfort of your couch. We’ll discuss two of such options that investors turn to because of the ease with which investments can be done online. These are the tax-saving fixed deposits and equity-linked savings scheme (ELSS).
Both tax-saving deposits and ELSS funds are long-term investment options with lock-in periods. Both allow you to claim tax deductions up to Rs 1.5 lakh, though you can invest a higher amount.
Tax-saver deposits can be booked with public and private sector banks by individuals and HUFs. On the other hand, ELSS funds are diversified equity mutual fund options. Your capital is invested primarily in the stock market. Most AMCs will require you to invest at least R1,000 for a lump-sum investment, while lower amounts are permitted through SIPs.
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How to buy
Either can be availed by walking into the nearest bank branch or AMC office with your KYC documents and a cheque for the amount you wish to invest. You can even invest online. Tax-saving deposits can be booked through your net-banking account. ELSS funds can be bought through trading accounts, online mutual fund distributors, or directly from your preferred AMC’s website.
Risk and returns
In terms of returns, the two options are like apples and oranges. Fixed deposits keep your capital safe and let you earn interest on it. In the current scenario, you can expect to earn 6-7% per annum on a five-year deposit. Senior citizens may earn a marginally higher rate.
As per the CRISIL-AMFI ELSS Fund Performance Index on December 2016, the ELSS category as a whole had annually returned 3.35% in the preceding one year, 16.64% in three years, 10.81% in seven years.
Both investments have a lock-in: five years for the deposits, and three years for ELSS. Some banks may allow premature withdrawals on tax-saver deposits, but such transactions may attract a penalty.
Banks deduct TDS on deposits, which makes deposits tax-inefficient. Banks will deduct 10% as TDS while you may have to cough up 20% more if you’re in the 30% tax slab. You can submit your 15H/15G forms with your bank to stop them from deducting TDS.
On the other hand, ELSS is tax-efficient. You’re not just claiming tax deductions under Section 80C, your returns are tax exempt fully. Equity investments older than 12 months are tax exempt where securities transaction tax has been paid.
What to pick
If you’d rather keep the money safe and earn moderate returns, fixed deposit is for you. If you don’t mind betting on the markets, you should give the ELSS a chance.
The writer is CEO, BankBazaar.com