Evaluate the Risk – ELSS or Fixed Deposits?

After another financial year goes by, many people may find that they have done nothing in terms of planning their taxes. In this common scenario, individuals now look for easy options that they can conveniently invest in. And fixed deposits (FD), equity-linked saving schemes (ELSS) can serve as good options wherein investments can be done online.

These options are long-term investments that have a certain period wherein a person is not allowed to sell the shares. Also, both allow you to claim a tax deduction of INR 1.5 Lakh.

Here are some of the things you should keep in mind before investing in either:

Buying Procedure

To invest in these you may visit a bank or an asset management company. On the other hand, you can also invest in a fixed deposit via the net banking service, and in ELSS, with the help of online trading accounts and websites of investment companies.

Evaluating your Risk vs. Returns

For this criteria, comparing ELSS and fixed deposits isn’t easy. But keep in mind that an FD will ensure that your investment is secure while letting you get the interest from it. According to the current market conditions, a fixed deposit can give a return of 6-7% a year on a deposit period of five years. Moreover, for senior citizens, this rate may be slightly higher.

Now for ELSS, according to a December 2016 report, this type of investment gave a yearly return of 3.35% in the previous year, 16.64% in 3 years, and 10.81% in 7 years. You can calculate the returns by using online FD calculator.

The Lock-In Period

In the case of fixed deposits the lock-in period is 5 years, and for ELSS it is 3 years. Certain banks might allow an early withdrawal on a tax saver fixed deposit, but note that this can come at the cost of a penalty.

Tax Benefits

Note that in terms of tax benefits, ELSS offers a better deal compared to fixed deposits. In the case of fixed deposits, banks can deduct 10% as TDS. This can even be 20% if you fall in the tax bracket of 30%. To stop TDS from being cut, you can submit a 15H/15G form to your bank.

However in the case of ELSS, you can not only claim a tax deduction under Section 80C, but your tax returns are also exempted from any taxation.

With all these factors in mind, one can decide whether to go for a fixed deposit or ELSS. If you wish to secure your capital and get reasonable returns on an investment, you can go for a fixed deposit. But if you’re open to taking market risks, you may consider investing in ELSS.