ELSS vs Tax Saving FD

With investment in tax-saving instruments gaining momentum in the last quarter of the financial year, two of the most commonly used avenues are equity-linked savings scheme (ELSS) and a tax-saving fixed deposit (FD).

At first glance, the choice between the two may seem straightforward as investments up to Rs. 1.5 lakhs in both, qualify for tax exemption under section 80C of the Income Tax Act, 1961. However, there are some key differences between them which you must know to make the right choice.

We have compared both these instruments on parameters such as ease of investing, associated risk and return equation, lock-in period, tax-efficiency and liquidity.

  • Investment ease

One of the fundamental aspects of investing in a tax-saving instrument, particularly during this time of the year, is the ease with which you can invest.

With little time left to declare investment proof to company HRs and otherwise to lower tax liability, it’s important that your chosen instrument offers investment ease.

Both ELSS and a tax-saving FD are on equal footing when it comes to making an investment. In case of ELSS, you can invest either directly through the chosen AMC’s website or via an intermediary. There are several online platforms that allow quick and prompt investment in an ELSS fund. You can either invest a lump sum or set up an SIP in the desired fund.

To invest in a tax-saving FD, all you need to do is to walk into the branch of the bank where you hold an account, fill up the FD form and the given amount is debited directly from your account. Most banks provide the certificate of investment on the same day. You can also invest in a tax-saving FD via net banking.

  • Risk and return

Being equity-oriented, the risk associated with investing in ELSS is higher than a tax-saving FD. While the performance of an ELSS fund depends on market movements, a tax-saving FD is latent to volatility. However, the risk of ELSS investment is mitigated to a great extent if you invest via SIP which averages out your purchases over time.

A tax-saving FD, on the other hand, may be less risky than ELSS, but the returns could be pale compared to the latter. Being equity oriented, ELSS holds an edge over a tax-saving FD in generating inflation-adjusted returns in the long run. While tax-saving FDs tend to offer single-digit returns, investing in a good ELSS fund may offer you wealth creation potential, in the long-term.

  • Lock-in period and liquidity

Among all the tax-saving options, ELSS has the short lock-in period of 3 years compared to 5 years of a tax-saving FD. It means you can withdraw money from your ELSS investment after 3 years, if desired. On the other hand, you can’t break your tax-saving FD before completion of 5 years.

Also, note that in case of investment in ELSS via SIP, each instalment gets lockedin for 3 years. Working on a first-in, first-out (FIFO) methodology, the units locked in first are redeemed first and so on.

So, in case you want to show proof of investment to your HR to avoid TDS, you can redeem the units that have completed the 3-year lock-in and reinvest the proceeds to lower your tax liability.

Tax efficiency

The imposition of 10% long-term capital gains (LTCG) tax on the sale of equityoriented funds announced in Union Budget 2018 made investors a little jittery.

 However, despite imposition of LTCG tax, ELSS are more tax-efficient than an FD. There are two reasons for it. First, the LTCG tax is applicable only if the gains are above Rs 1 lakh in a year.

Second, interest from a tax-saving FD is added to your income under ‘Income from Other Sources’ and taxed as the per the existing income tax slab. This further lowers return from a tax-saving FD.

The table given below captures the major difference between ELSS and a taxsaving FD:



Tax Saving FD

Investment ease



Lock-in period

3 years

5 years




Risk and returns

Market linked

Low and fixed

Investments in mutual funds are subject to market risk while tax saving FD will
offer assured returns.

Go for either of these instruments based on your risk appetite, financial goals and investment horizon.

While you may know the process of investing in a tax-saving FD seeing your parents do it over the years, to understand the nuances of ELSS investment, visit https://savetax.idfcmf.com

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