When the tax-filing season comes around, everyone scrambles from pillar to post to file Read this page 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.
What is ELSS?
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.
What is a tax-saving FD?
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
Key features of ELSS
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:
Bulk investment in company equities with some debt exposure
Can be growth- or dividend-oriented
Lock-in period of three years
Market-linked returns, with a probability of reasonable performance
Returns can beat inflation in the long run
Subject to market risk and volatility
Investments can be made in lumpsum or SIP
Each SIP unit to be held for three years for taxation purposes
Eligible for a tax deduction of Rs.1,50,000 p.a. under Section 80C of the Income Tax Act
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.
Premature and partial withdrawals are not allowed
Key features of Fixed Deposits
Tax-saving bank deposits have the following features:
Debt or fixed-income instrument with a bank
Lock-in period of five years for taxation purposes
Low risk with assured returns
Interest payout schedule can be monthly, quarterly, half-yearly, annually, or at maturity
Senior citizens are eligible for higher interest rates
Eligible for a tax deduction of up to Rs.1,50,000 p.a. under Section 80C of the Income Tax Act
Interest earned will be taxed according to the income slab of the investor
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