Which One is better- ELSS, FD or SSY?

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ELSS or FD or SSY

Wondering whether you should invest in Fixed Deposits (FDs), Sukanya Samriddhi Yojana (SSY) or Equity Linked Savings Scheme (ELSS)? This is a common dilemma as far as most investors are concerned. The prudent way would be to compare average returns on FDs by using an online FD Calculator to the returns generated by SSY through Sukanya Samriddhi Yojana Calculators. You can also bring in the average ELSS returns into the mix as well to determine where you should be investing.

The Income Tax Act of 1961 will enable savings of up to Rs. 1.5 lakh under Section 80C provided you invest money in financial instruments like ELSS (Equity Linked Savings Scheme) or SSY (Sukanya Samriddhi Yojana). You can also get these deductions on FDs only if you invest in tax-saver FDs. Otherwise, the interest on FDs will be taxable based on your income tax slab and TDS (tax deducted at source) is deducted in case the interest earnings on your deposit cross Rs. 10,000.

Now, are you confused whether to choose between FD, ELSS and SSY? Here is your handy guide towards taking a final decision.

ELSS in a nutshell

  • Equity Linked Savings Scheme is a specific equity fund and the sole mutual fund eligible for deductions under Section 80C.
  • It is provided by mutual fund houses or asset management companies and has lock-in periods of 3 years and minimum investment amounts can be Rs. 500.
  • ELSS investments can be carried out via SIPs (Systematic Investment Plans).
  • ELSS returns are tied to the market and can hover between 11-15% although premature withdrawals are not allowed for investors.
  • LTCG (long-term capital gains) is taxed on ELSS investments at 10%. Up to Rs. 1 lakh annually is exempted from taxation however.

Tax-Saver FDs in a nutshell

  • Tax-saver FDs are those with lock-in periods of 5 years and are one of the safest investment avenues with guaranteed returns.
  • Tax-saver FDs are provided by private and public sector banks, the Post Office and also small finance banking institutions.
  • Minimum investment amounts can start from Rs. 100 and interest rates are usually between 6.5-8.25% per annum. Interest rates are slightly higher by 0.25-0.50% for senior citizens.
  • Premature withdrawals are not allowed before the 5-year lock-in period is completed.
  • Loans cannot be taken against these deposits.
  • TDS will be deducted on the basis of the tax slab applicable for the interest earned on the tax-saver FD.

PPF in a nutshell

  • PPF is a savings scheme by the Central Government which also fixes the interest rate on a quarterly basis.
  • There are zero risks like tax-saver FDs on this investment since the Central Government pays the interest earned on deposits.
  • Lock-in periods are 15 years for this investment and the minimum investment amount can be Rs. 500.
  • The PPF interest rates are usually between 7.8-8% on an average.
  • Premature withdrawals are permitted after the completion of the 5th year of the PPF account.
  • Loans can be taken after the 3rd year of the PPF account until its 6th
  • Interest earned on the PPF contribution is free from taxes and so is the maturity amount.

Differences between ELSS, Tax-Saver FD and PPF

  • Lock-In Tenor- The lock-in period is 3 years for ELSS investments while it is 5 years for tax-saver FDs. PPF has the highest lock-in period of 15 years amongst all three investment options.
  • Minimum Amount for Investment- For ELSS and PPF alike, Rs. 500 is the minimum investment amount while it can be just Rs. 100 in case of tax-saving FDs.
  • Investment Returns- ELSS has the highest average return threshold hovering between 11-15% on an average while tax-saver FDs can give you returns between 6.5-8.25% on an average. PPF interest rates are usually around the 8% threshold in most cases.
  • Level of Risks- ELSS investments have the highest levels of risk although they are usually at a moderate level. The risk levels are comparatively lower for PPF and tax-saver FD investments where you get fixed interest rates on your deposits/investments.
  • Withdrawals- Premature withdrawals are not allowed in case of ELSS and tax-saver FDs although it is allowed in case of PPF subject to terms and conditions.
  • Obtaining Loans- Tax-saver FDs are unlike regular FDs since loans cannot be obtained against them and the same story applies in case of ELSS investments. However, based on certain terms and conditions, loans can be taken against PPF investments.
  • Taxes- TDS applies on tax-saver FDs while LTCG (long-term capital gains) tax is applicable for ELSS investments. At the same time, PPF investments are completely tax-free both in terms of the interest earned and the maturity amount received at the end of 15 years. LTCG is exempted up to Rs. 1 lakh annually from taxation.

Now that you know the differences, you will naturally want to go for the best returns. ELSS investments make sense if you’re disciplined, stick around for the long haul, are patient and can invest via SIPs to minimize your risks. Additionally, you can consider the other two for your portfolio as well, albeit without locking much money for a long period of time.