Quick Tax Savers: 5-Year Fixed Deposit or ELSS?

The financial year-end is drawing close. Many who’ve ignored tax planning all year long will now be panicking and looking for quick-fix tax-saving solutions. Then, there are those who’ve done their tax planning but have fallen a little short and now need a quick-fix to cover up.

The need to find quick solutions brings us several options. But 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 find the rules and paperwork confusing, and you’re not looking to queue up at the nearest post office. You’d rather find an option from the comfort of your couch. Well, you’re in luck. There are some tax-saving options for you as well.

We’ll discuss two of these options here that investors turn to because of the ease with which they can be booked online. These are the tax-saving fixed deposits and equity linked savings scheme.

Overview

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 if you so wish.

Tax-saver deposits can be booked with public and private sector banks by individuals and HUFs. You can start with amounts as small as Rs. 500, depending on your bank’s rules.

On the other hand, ELSS funds are diversified equity mutual fund options. Your capital is invested primarily in the stock market, and you earn market-linked returns. While it would be ideal to invest in any mutual fund through SIPs, you can do a one-time lump sum investment to fulfil your urgent tax-saving needs. Most AMCs will require you to invest at least Rs. 1000 for a lump sum investment, while lower amounts are permitted through SIPs.

How To Buy

Investing in either options is easy. 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. But you can also complete these tasks through the internet.

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 by simply signing up as a new user and buying the fund you have chosen. You can shortlist funds by taking a financial advisor’s help, or do your own research by online by going through the information on various mutual fund websites.

Risk & 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 approximately 6-7% P.A. on a five-year deposit. Senior citizens may earn a marginally higher rate.

ELSS, by definition, is an equity investment. Therefore all the risks of equity investing apply. 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, and 10.61% in 10 years. It had, therefore, outperformed such tax-saving options as PPF and NSC in the long run. However, past performance of these funds is no guarantee of future returns.

As an equity investor, the best you can do is pick your fund carefully after research, and ride out the market volatility by remaining invested for the long term.

Lock-in

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. As per the rules of taxation, if you redeem an investment less than three years after claiming tax deduction through it, your tax savings get rolled back.  

Taxation

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 greatly tax-efficient. You’re not just claiming tax deductions under Section 80 C, your returns are tax-exempt fully. Equity investments older than 12 months are tax-exempt where securities transaction tax has been paid. An ELSS, through its three-year lock-in, easily rides past the one-year requirement.

What To Pick

What to choose between tax-saver deposits and ELSS comes down to one thing: what’s your risk appetite? If you’d rather keep the money safe and earn moderate returns, the deposit is for you. If you don’t betting on the markets, you should give the ELSS a chance. 

(A version of this article originally appeared in The Financial Express.)

 BankBazaar is your one-stop shop for your personal finance needs! Visit ourMaha March Bonanza to shop for a Personal Loan, Car Loan, Home Loan or Credit Card with free gift vouchers (T&C Apply)