When the tax-filing season comes around, everyone scrambles from pillar to post to file returns. While some judicious planners may have already invested in tax-saving schemes, others may try to get it done at the last minute.

Two of the most popular tax-saving investments are equity-linked savings schemes (ELSS) and five-year fixed deposits with a bank or post office. Both are eligible for up to Rs.1,50,000 tax deduction under Section 80C  of the Income Tax Act, 1961, although they have different investment implications for the investor.

 ELSS is essentially a mutual fund with an equity focus, with at least 80 percent investment in company stocks, although it may also have a debt component. ELSS funds have a unique tax benefit, making them both investment and tax-saving instruments.

As the name suggests, this instrument is a bank fixed deposit eligible for a tax deduction. It has a lock-in period of five years. Tax-saving FDs can be availed at public, private, or small-finance banks, while post offices offer tax-saving time deposit schemes with a maturity period of five years at different interest rates

ELSS are different from other equity mutual funds because of their tax feature as well as lock-period. Given below are the main characteristics of ELSS funds:

1. Bulk investment in company equities with some debt exposure
2. Can be growth- or dividend-oriented
3. Lock-in period of three years
4. Market-linked returns, with a probability of reasonable  performance 
5. Returns can beat inflation in the long run
6. Subject to market risk and volatility
7. Investments can be made in lumpsum or SIP
8. Each SIP unit to be held for three years for taxation purposes
9. Eligible for a tax deduction of Rs.1,50,000 p.a. under Section 80C of the Income Tax Act
10. Gains from ELSS funds held for more than 12 months attract long-term capital gains tax at 10 per cent if the total long term capital gains amount from equity oriented mutual funds/ equity shares exceed ₹1,00,000 in a year.
11. Premature and partial withdrawals are not allowed

Tax-saving bank deposits have the following features:

1. Debt or fixed-income instrument with a bank
2. Lock-in period of five years for taxation purposes
3. Low risk with assured returns
4. Interest payout schedule can be monthly, quarterly, half-yearly, annually, or at maturity 
5. Senior citizens are eligible for higher interest rates
6. Eligible for a tax deduction of up to Rs.1,50,000 p.a. under Section 80C of the Income Tax Act
7. Interest earned will be taxed according to the income slab of the investor 

To make an informed decision regarding which instrument to invest in for tax purposes, here is a direct comparison of their key characteristics:

When you are considering how to save tax through investments, both ELSS and FDs may sound like a good option. However, it is crucial to evaluate the choices based on your individual financial portfolio. Age, income, risk capacity, and time are some aspects to look into.

ELSS is essentially a mutual fund investment , suitable for investors with a high-risk tolerance. The investment is popular among those looking for wealth creation while saving on tax. If you are a young investor, ELSS can be a suitable option because of the time you have to take on such risks. Another appealing factor of ELSS is that it has one of  the lowest lock-in period among other tax-saving investments, making it a good investment for those who can commit funds only for three years. Since potential returns could be  reasonable , ELSS can also be used to fulfill specific financial goals.

Fixed deposits are convenient and safer, making it an ideal investment for those with a low-risk appetite. Older investors and senior citizens tend to favor this over other options. Returns are guaranteed and the lock-in period is five years; still lower than some other tax-savers. Investing in an FD is also straightforward because anyone with a bank account can do it, either at the branch or online.

Conclusion

There is no one-shoe-fits-all solution when it comes to savings and investments. As an investor, it is imperative to do your research and understand how mutual funds or FDs fit into your overall financial portfolio. Another approach would be to split your investments among different instruments to benefit from diversification.

This document is for general information only and does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this information. This document provides general information on performance; financial planning and/or comparisons made are only for illustration purposes. The data/information used/disclosed in this document is only for information purposes and not guaranteeing / indicating any returns in any manner. This material provides general information and comparisons made are only for illustration and informative purposes only. Investments in mutual funds relatively involve higher risks and recipient should consult their legal, tax and financial advisors before investing. Recipient of this information should understand that statements made herein regarding future prospects may or may not be realized or achieved. The AMC, Trustee, their associates, officers or employees or holding companies do not assure or guarantee any return of principal or assurance of income on investments in mutual fund schemes.