ELSS vs Fixed Deposits

When it comes to the popular investment options that can also provide tax savings, two names that stand out are Equity Linked Saving Schemes and Fixed Deposits. Here’s a look at how ELSS fares against fixed deposits and which is a better choice for you as an investor: 

What are fixed deposits?

Fixed deposits refer to making term deposits with banks. The biggest attraction of fixed deposits is that there is almost zero risk involved, and depositors get guaranteed returns. 

There are two categories of fixed deposits:

  • Tax-saver term deposits where you deposit have a lock-in period of up to 5 years. Depositors cannot prematurely withdraw; and
  • Regular fixed deposits carry a tenure of 7 days to 10 years. The option to withdraw prematurely is also available. 

Regular FDs offer no tax benefits. On the other hand, a tax saver fixed deposit can help deposit holders claim a deduction of up to INR 1.5 lakh under Section 80C of the Income Tax Act.

The interest payout options of FDs also vary. The frequency can be monthly, quarterly, or half-yearly. Holders of regular FDs can use it as collateral and avail of a loan against it. 

The interest rate offered on FDs varies depending on the bank where you make the deposit. Senior citizens are entitled to receive a higher interest rate. 

What is ELSS?

Equity Linked Savings Schemes or ELSS is a type of equity mutual fund investment. Investors can set up a SIP to invest in ELSS or do a one-time lump sum investment. A dividend is earned on the investment, but it is not subject to any tax deductions.  

As a mutual fund, there are lock-in restrictions on ELSS. However, it is only for a period of 3 years.  The returns offered by ELSS are fairly high, but there is always a risk element involved. In case the equity fund fails to perform, the returns generated by the ELSS are much lower.

ELSS attracts tax benefits under Section 80C of the Income Tax Act in India. Investors can claim a tax deduction for a maximum amount of Rs.1.5 lakh every year. 

Which is the right investment option for you?

Both ELSS and FDs appear to be good investment choices. However, which one is best suited for you requires a detailed examination. You need to take into account your risk profile, age, income, investment horizon, and financial portfolio to decide which one you should opt for. 

To recap, ELSS is a mutual fund investment offering tax benefits. Therefore, it is best suited for investors who have a high-risk appetite. Even though the returns offered are higher than fixed deposits, there are no guaranteed returns. The performance of ELSS is linked to market conditions.

Anyone who wants to create wealth while saving on tax liability is best suited to invest in ELSS. Moreover, the reduced lock-in period of ELSS also makes it a popular choice when investors consider different tax-saving investments. If you only want to stay invested for three years, you can consider investing in ELSS funds. Fulfilling specific financial goals is also another objective behind investing in ELSS.

On the other hand, investments in fixed deposits are a safer option due to their low-risk profile and guaranteed returns. This makes them ideal for senior citizens and other investors who want to play it safe due to their low-risk appetite.  Fixed deposits offer an element of safety that ELSS never can since the returns from such deposits are not linked to the market conditions. 

Even though the lock-in period is five years, it is still lower than other tax-saving instruments offering similar returns. Lastly, loans can be borrowed against fixed deposits, an advantage ELSS doesn’t offer. If you want to keep the option of availing loans open, choosing fixed deposits over ELSS may make more sense.

Lastly, how much tax benefits you can gain from these investment instruments also plays a critical role in influencing your choice. When compared to ELSS, tax-saver FDs are not as efficient. This is on account of the fact that interest is considered a part of your total income and taxed at the applicable slab rate.

Here’s where ELSS receives a massive leg up. When you invest in ELSS, long-term capital gains up to INR 1 lakh every year is tax exempt.  Gains above the ceiling attract a flat rate tax of 10 percent plus cess and surcharge. Dividends are considered part of the overall income and taxed as per the slab rate.


When it comes to savings and investment instruments, there is never a one-size-fits-all solution available. You should do your research and consider every instrument based on your financial goals and investor profile. A savvy investor never places all the eggs in the same basket — in other words, spreading your investment across different options and diversifying your portfolio is a great way to achieve stronger financial health. 

So before you, part with your hard-earned money, make sure to speak to an investment advisor who can guide you on the right path. Our team at Moneyfront is always available to advise you on how to go about your investment planning. Give us a call, and let us help you make the right choice.

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Yonita is the pillar of Client servicing at Moneyfront. She has worked with Citibank for over 25 years in operations and client servicing. In her stint with Citi, she has managed large service setups and her rich experience of banking spans across managing clients, operations, audits and compliance matters. She epitomises ‘client excellence’ in the true spirit of the word. Her motto and single-minded focus is to make sure every client is a happy client.