ELSS to save tax liability

March is about to end, and there may be a few of you still looking to make a last-minute dash for saving taxes. Section 80C of the Income-Tax Act allows up to Rs 1.5 lakh of tax-deductible investments in various avenues. If you have not strained yourself with investment planning all year, it is likely that you are looking for a quick fix now as well. Worry not. You have investment options to help you save tax under Section 80C.

Thanks to the internet, investments are now a breeze. You can make them from the comfort of your couch now, with just your smartphone. In this article, we are going to talk about two such options — ELSS funds and the five-year fixed deposit. The two are apples and oranges in terms of features, so let’s take a hard look at them.

ELSS
Equity-Linked Saving Schemes (ELSS) are mutual fund schemes which invest in the equity market. There is a three-year lock-in period during which withdrawals are not allowed. The investments you make are tax-free and the returns after the lock-in period are also tax-free. You can invest in a lump sum or use a SIP.

Pros

• Equity investments can provide high returns
• Lock-in tenure is lower than other options such as PPF
• Facility of monthly or lump sum investments make the scheme universally applicable

Cons

• Equity investments are prone to market risks. Thus, ELSS investments are risky.
• You cannot withdraw any amount during the lock-in period making the investments rigid.

5-year Fixed Deposits
You can make a five-year fixed deposit with any bank or post office. You can invest a lump sum amount for a minimum tenure of five years. The rate of interest is fixed and depends on the tenure chosen and the amount of investment made. Moreover, senior citizens are allowed a higher rate of interest. The amount deposited helps you save tax. However, the interest generated is taxable.

Pros

• Fixed deposits give risk-free returns. Thus they are ideal for those who are risk-averse and like guaranteed returns.
• FDs are useful if you do not want to invest with a short-term perspective.

Cons

• Though returns generated are guaranteed, they are taxable. Thus you lose out on the interest earned by paying tax on it.
• A high lock-in tenure of five years makes it unsuitable for short-term investors
• Currently, returns are in the 6.5 per cent range, and post-tax returns are even lower.

Comparison of ELSS and five-year Fixed Deposit Returns
ELSS funds being equity investments take high risks and can provide high returns.
As per the Crisil-AMFI ELSS Fund Performance Index in December 2016, the ELSS fund category has generated annual returns of 3.35 per cent in the last year, 16.64 per cent in the preceding three years, 17.71 per cent in five years, and 10.61 per cent in 10 years. This means ELSS funds have outperformed many small savings schemes in the long run, though short term performance has been weak.

Fixed deposits, on the contrary, have guaranteed returns even if they may not compare to long-term returns from ELSS funds. Currently, the fixed deposit market would offer rates anywhere between 6.5 per cent to eight per cent.

Lock-in
ELSS schemes fare better in this regard as they have a lower lock-in period compared to the five-year fixed deposits.

While the former involves a lock-in period of three years, the latter, as the name suggests, locks in your deposits for five years.

Where to buy
ELSS and FDs can both be booked by walking into the nearest branch office with your KYC documents along with a cheque for the amount you wish to invest. However, we would recommend buying online. ELSS funds can be bought from the websites of fund houses or mutual fund distributors. You can register with the website, complete your KYC compliance, and start buying mutual funds immediately. For FDs, you can log on to your netbanking account to create a five-year deposit instantly.

Taxation
Equity inves-tments are very tax-efficient since they become tax-free in the long term, which is fixed at one year. So ELSS funds have an advantage over defeat fixed deposits. Though the amou-nt of money invested in both qualify for tax exemptions under Section 80C, only ELSS schemes prom-ise a tax-free return. Returns generated by the five-year FDs attract tax at your prevailing tax slab rate.

The Final Word
As per the above comparison and after weighing the pros and cons of each instrument, there are benefits in buying either instrument. However, the final decision comes down to one question: do you have the risk appetite for equity investments? If yes, you can proceed with ELSS investments, remain invested for the long term, and reap above-average returns.

(The writer is the CEO of BankBazaar.com)