Should you invest in tax saving FDs or ELSS?

The month of March can also be termed as tax-saving month as people usually run for the last-minute solution to save tax rather than planning it at the start of every financial year. Planning for saving tax at the start of every financial year can help you relax in the month of March and also keep you away from products which from an investment perspective won’t prove to be that efficient over the long run. There are various tax-saving instruments in the market which qualify for the tax deduction of Rs. 1.5 lakhs under section 80C of the Income Tax Act. Two such investment products are tax saving bank FDs (Fixed Deposits) and ELSS (Equity Linked Saving Scheme). Let’s find which is a better instrument for tax saving.

If we talk about tax saving bank FDs then the average interest rate of a 5-year tax saving bank FD is 7.22 per cent for general and 7.67 per cent for senior citizens and average 5-year return on ELSS is 15.59 per cent. So, let us assume that for tax saving purpose you invested lumpsum of Rs. 1.5 lakhs in tax saving FDs then at the end of 5-year you would end up with accumulating Rs. 2.13 lakhs for general and Rs. 2.17 lakhs for senior citizens. On the contrary, if you had invested in ELSS then you would have accumulated Rs. 3.10 lakhs.

So, as you can see from the above illustration that ELSS is far better than your tax saving FDs. Even the lock-in period of ELSS is 3 years which is less than tax saving FDs as they have a lock-in period of 5 years. Does it mean that one should refrain from investment in tax saving FDs? It completely depends on the risk appetite of a person. A conservative investor may invest in tax saving FDs. However, moderate and aggressive risk takers must strictly avoid investing in tax saving FDs.