Tax query: ELSS or FD—Which is the Best Tax Saving Option under Section 80C?

Mr Raman needs to invest Rs 1 lakh in tax-saving mutual funds for FY 2019-20 and save taxes for this year. His father advised him to invest in tax-saving FDs and claim the deduction under Section 80C for the same like his dad. Is it better to choose and invest his money in mutual funds instead of FDs?

As compared to various tax-saving avenues available under Section 80C of the Income Tax Act, ELSS funds are the most suitable ones. These funds come with the lowest lock-in period of 3 years and provide tax benefits along with potentially high returns of 14%-16% in the medium and long term. Any gains on redemption above Rs 1 lakh will be taxable. 

Whereas, tax-saving FDs have a minimum lock-in period of 5 years and maximum interest earned on such investment is usually between 6%-7.5%. The returns will be added to your tax slab and taxed accordingly. 

You have to consider a lot of factors before investing; age, investment horizon, and risk appetite are a few significant ones among them. People who want dual benefits—wealth growth and tax benefits prefer ELSS.

Long-term investors with higher risk appetite find ELSS a sensible option. On the other hand, people nearing retirement may choose to invest in tax-saving FDs as they tend to opt for lower risks and guaranteed returns. In short, you must always choose an investment scheme based on your financial goals and risk profile.

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