With March coming to an end, you may still be making a dash for a tax-saving investment. Section 80C allows you to claim deductions up to Rs.1.5 lakh per year, so if you haven’t bothered yourself with tax planning all year, chances are you’re looking for a quick fix in the final week.
But, can you buy some investments from the comfort of your couch without having to queue up at a bank or post office? Absolutely.
Thanks to the internet, tax-saving is now a breeze. In this article, we’ll talk about two tax-saving options you can avail online: ELSS Mutual Funds and the Five-year Fixed Deposit.
But, before you rush into either of these instruments, understand and compare the two and make an informed choice. So, here’s a quick summary of what an ELSS scheme and a 5-year Fixed Deposit have to offer.
Additional Reading: 5 Tax Saving Options For You
ELSS
Equity-Linked Saving Schemes are Mutual Fund schemes which invest in the equity market. There is a 3-year lock-in period during which withdrawals are not allowed. The ELSS investments you make help you save tax, and your returns are also tax-exempt. You can invest in a lump sum or use an SIP.
Pros
- Equity investments can provide great long-term returns.
- Low lock-in tenure allows liquidity sooner than other tax-saving schemes such as PPF.
- Facility of monthly or lump sum investments.
Cons
- Equity investments are prone to market risks. Thus, ELSS investments are very risky in the short term.
- You cannot withdraw any amount during the lock-in period.
5-year Fixed Deposits
You can make a 5-year fixed deposit with a bank or post office. The rate of interest is fixed and depends on the tenure chosen and the amount of investment made. Senior citizens receive a higher rate of interest. The interest generated on the deposit is taxable.
Pros
- Fixed Deposits give risk-free returns and are ideal for the risk-averse investor.
- Useful if you do not want to invest with a short-term perspective.
Cons
- Low tax efficiency means your absolute returns are lower than offered rate of return.
- A high lock-in tenure of 5 years makes it unsuitable for short-term investors.
- Returns are at a conservative 6.5% to 7.8%.
Comparing ELSS with 5-year Fixed Deposits
Returns
As per the CRISIL AMFI ELSS Fund Performance Index for December 2016, the ELSS fund category as a whole has earned returns at 10.61% per year over the preceding 10 years, thus outperforming most small savings schemes. This is because equity as an asset class has higher risks and higher returns. Fixed Deposits, on the contrary, have lower but assured returns and none of the volatility of ELSS funds.
Lock-in
ELSS funds have a three-year lock-in period. If you purchase an ELSS fund through SIP, you can redeem them through the FIFO (first in first out) method three years from the purchase date of your units. The five-year deposit, as the name suggests, has a lock-in for five years and premature withdrawals may come with interest rate penalties.
Taxation
Here, ELSS funds trump the 5-year deposits. Though the amount of money invested in both qualify for tax exemptions under Section 80C, only ELSS schemes promise tax-free returns. Returns generated by 5-year FDs attract tax at your prevailing income tax slab rate.
Where to buy
ELSS funds can be bought online through the websites of fund houses or through online distributors. Offline, they can be purchased through the branch offices of fund houses or agents. The five-year FD can be booked instantly through your netbanking account, or by visiting your bank branch or post office. In both investment options, you’ll need your KYC documents.
Here’s how Rs.1 lakh invested in an ELSS scheme as well as a 5-year Fixed Deposit scheme would fare:
| ELSS scheme | 5-year Fixed Deposits | |
| Amount invested | Rs.1 lakh | Rs.1 lakh |
| Tenure | 5 years | 5 years |
| Rate of interest p.a. (assumed) | 12% | 8% |
| Expected corpus after the stipulated tenure | Rs.176,200 (rounded off to the nearest hundred) | Rs.146,900 |
| Return generated | Rs.76,200 | Rs.46,900 |
| Tax payable on returns (assuming you are in the 10% slab rate) | Nil | Rs.4,690 |
| Actual returns post tax | Rs.76,200 | Rs.42,210 |
Conclusion
ELSS funds are a great, long-term option for not only saving tax but also for wealth creation with greater tax efficiency. While short-term volatility is a regular feature of the stock market, looking at the bigger picture when it comes to equity markets suggests they have outperformed other asset classes over a long period.
In this sense, ELSS funds have an advantage over the five-year FD. However, what you pick ultimately comes down to your risk appetite. If you are risk-averse and are happy with net returns around 5% PA, then a 5-year FD should suit you fine.
In any case, there isn’t much time left for the financial year to end, so make your choice as soon as possible.