Tax Saving FD vs ELSS: Which option should you choose for a lump-sum investment? Which one offers better returns?

If you have a lump sum and want to grow it while saving tax, the biggest question is whether to choose a Tax-Saving FD or an ELSS Mutual Fund. Both offer tax exemptions under Section 80C of the Income Tax Act, but they differ significantly in terms of returns, risk, and lock-in periods. Therefore, making the wrong choice can cost you your profits. Find out here whether an FD or an ELSS is better for a lump sum investment, where you'll find higher returns, and which option is right for which investor.

What is a Tax-Saving FD?
A Tax-Saving FD, or a tax-saving fixed deposit, is an investment in which you deposit a lump sum for 5 years. The interest earned is pre-determined, and the investment is considered completely safe.

Key Features of Tax-Saving FDs

Lock-in Period: 5 years
Tax Exemption: Up to ₹1.5 lakh under Section 80C
Risk: Almost negligible
Returns: 6% to 7.5% annually (depending on the bank)
Tax on Interest: Applicable
This option is suitable for those who are risk-averse and want fixed returns.

What is an ELSS Mutual Fund?
ELSS, or Equity Linked Savings Scheme, is a mutual fund that invests in the stock market and offers tax savings. Investments can be made through both lump sum and SIP methods.

Key Features of ELSS
Lock-in Period: 3 years (lowest under 80C)
Tax Exemption: Up to ₹1.5 lakh
Risk: Market-linked
Potential Return: 10% to 15% or more
Long-Term Capital Gains Tax: 10% above ₹1 lakh
If you can take a little risk and want higher returns over the long term, ELSS can be a strong option.

Profit Potential
For some time now, the RBI has been reducing the repo rate, and with it, the interest rate on bank FDs is also decreasing. Recently, the RBI reduced the repo rate by 0.25%, bringing the repo rate to 5.25%. Therefore, FD interest rates may decline further in the coming days. If FD returns decline further, it will be incapable of beating inflation.

While ELSS involves market risk, it also has the potential to beat inflation. This market-linked scheme is volatile, but the potential for recovery over time is high, making ELSS a profitable investment in the long term.

Lock-in Period
Tax-saving FDs have a lock-in period of 5 years. You cannot withdraw it prematurely. However, ELSS has a lock-in period of 3 years. This is the shortest lock-in period compared to PPF and tax-saving FDs.

Tax Benefits
Both Tax-saving FDs and ELSS offer tax benefits under Section 80C. The interest earned on Tax-saving FDs is taxable. It is added to your income and taxed as per the slab. In ELSS, when sold after a lock-in period of 3 years, the profit earned is considered a long-term capital gain. Profits up to ₹1.25 lakh in a financial year are completely tax-free. Gains above ₹1.25 lakh are taxed at 12.5%.

FD or ELSS: Which to Choose?
Tax Saving: Both FD and ELSS are good tax-saving strategies, but ELSS offers better returns and lock-in. FD offers security, while ELSS offers higher returns over the long term. The right choice depends on your risk appetite and investment goals. However, before investing in ELSS, be sure to consult a financial advisor, as the right timing is crucial.

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