Investing wisely is crucial for securing financial stability and achieving long-term goals. When considering a five-year investment with a lock-in of Rs 10 lakh, the two popular options in India are Fixed Deposits (FDs) and Equity-Linked Savings Schemes (ELSS). Both come with distinct benefits and risks, making it essential to understand their features before deciding.
Tax Benefits: What Do FDs and ELSS Offer?
Both FDs and ELSS qualify for tax deductions under Section 80C of the Income Tax Act. This allows you to claim a tax exemption on investments up to Rs 1.5 lakh. However, the differences lie in their returns and approach to wealth creation:
- Tax-Saving FDs: Provide fixed returns and are low-risk. Interest earned is taxable under your income tax slab.
- ELSS: Being market-linked, these mutual funds have higher return potential. Long-term capital gains (LTCG) up to Rs 1 lakh are tax-free, while gains above this threshold are taxed at 10%.
Returns: A Comparative Look
When it comes to returns, ELSS outshines FDs by a wide margin, albeit with higher risks. Over the past five years, leading ELSS funds have delivered annualized returns between 22% and 33%, while five-year FDs offer fixed returns averaging 6.5% to 7.5% annually. For example:
ELSS Funds with Best 5-Year Annualized Returns:
- Quant ELSS Tax Saver Fund: 33%
- Sundaram Long Term Micro Cap Tax Advantage: 30.74%
- SBI Long Term Advantage Fund: 28.12%
- Bandhan ELSS Tax Saver Fund: 23.57%
Top 5-Year FD Rates (as of 2024):
- Post Office Time Deposit: 7.5%
- IndusInd Bank, YES Bank: 7.25%
- SBI, HDFC Bank, ICICI Bank: 7%
If you invest Rs 10 lakh, here’s how the maturity value compares:
- FD (7.5% p.a.): Rs 14,49,950 after 5 years.
- ELSS (25% average p.a.): Rs 30,51,760 after 5 years.
Liquidity and Lock-In Period: Flexibility Matters
- ELSS: Comes with a shorter lock-in of three years, offering better liquidity. You can redeem your funds after this period or let them grow further.
- FD: A five-year lock-in with tax-saving FDs means premature withdrawal isn’t possible without penalties.
Risk and Safety: Balancing Act
- FD: Fixed returns make FDs a low-risk, safe investment. Deposits up to Rs 5 lakh in a bank are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC).
- ELSS: Being equity-oriented, ELSS funds are subject to market fluctuations. While the potential for high returns exists, market downturns can reduce gains.
Which Option is Best for You?
The choice depends on your risk tolerance and financial goals:
- Choose FDs if you prioritize safety and guaranteed returns.
- Opt for ELSS if you seek higher returns and can withstand market risks. It’s particularly suitable for long-term wealth creation.
Both options have their merits, but the higher returns from ELSS make it a compelling choice for investors looking to grow their wealth while benefiting from tax savings.
