ELSS vs FD: Understand the Difference between ELSS and Fixed Deposit

Manish Kothari
20 Likes | 1013 days ago



isVerifiedExpertAuthor is a Zfunds Verified Expert
Manish Kothari

Understand the Difference between ELSS and FD

Equity Linked Savings Schemes (ELSS) also known as tax-saving mutual funds are those schemes that invest in equity markets along with providing tax benefits to its investors. ELSS is considered to be diversified in nature as they invest in stocks of companies across market capitalizations and pick companies from different sectors. Returns from ELSS funds are directly linked to the markets. Investments in ELSS funds are advisable for investors having a moderately high-risk appetite along with an investment horizon of at least 5 years. 

Features of ELSS

Long-Tenure Investment

ELSS schemes have a mandatory lock-in period of three years which means the investors cannot exit from the scheme before the lock-in period. After 3 years, the investors could stay invested or exit from the investment as per their will.

However, it is advisable to stay invested for a longer tenure of at least 5 years to earn potential good returns which could be generated through the equity exposures of the fund.  

Tax Benefits

Investments in ELSS funds are eligible for claiming tax deductions of up to Rs.1.5 lacs in a financial year under Section 80C of the Income Tax Act,1961. There are no upper limits for investment in these funds. For holdings longer than a year, gains that surpass Rs. 1 lakh are taxed with 10% Long Term Capital Gains (LTCG) Tax.


Investments in ELSS schemes generally involve moderate to high levels of risks owing to its exposures in equities. Equity markets are highly volatile in nature over the short term and can lead to high fluctuations in the NAVs (Net Asset Value) of these funds. Therefore, ELSS is recommended to moderately high-risk investors with a long horizon as the volatilities are reduced over the long term.

Also Read: PNB Bank FD Interest Rates

What is a Fixed Deposit (FD) ?

Fixed Deposits (FDs) are term deposits offered by banks, post offices, corporations, etc. These deposits are considered as one of the safest modes of investment. They are also known to offer higher returns or interest than a savings account. However, not all the fixed deposits are safe, for example- corporate fixed deposits carry higher risks than bank FDs and investors must invest with caution in these FDs.

Here, Investors have the options to deposit money for different tenures as per their needs & requirements. Only the FDs with a lock-in period of 5 years are eligible for claiming tax deductions under section 80C.

Fixed deposit have been a great avenue for those investors who are seeking ways to earn stable returns with low risks. 

Features of Fixed Deposits

Fixed deposits have been considered a great mode of investment due to great customer-oriented features which are discussed below.


Fixed deposits usually have a tenure range of 7 days to 10 years. Interest rates of fixed deposits also vary in accordance with different tenures and other factors. 

Safe mode of investment

Fixed Deposits are considered to be a safe mode of investment as compared to other investments. These deposits carry higher levels of stability with minimum risks. However, FDs with some NBFCs & institutions other than banks carry risks and investors must research their ratings to assess their credibility & understand the probability of defaults before making investments.


Fixed deposits offer fixed & stable returns on deposits. Because of lower risks, these deposits offer a lower rate of return.

Premature/Partial Withdrawal

Premature withdrawals are allowed in FDs subject to certain terms & conditions (might include penalties) laid down by institutions. Also, some institutions provide the facility of premature withdrawals without any charges.

However, in the case of tax-saving FDs, premature or partial withdrawals are not allowed. 

Tax Benefits

Fixed Deposits with a lock-in of 5 years are eligible for claiming tax deductions under Section 80C of Income Tax Act, 1961 for an amount up to Rs. 1.5 lakhs by investors.

Also Read: Loan Against Fixed Deposit (FD)

Comparison Between ELSS Funds and Tax Saving FDs


Equity Linked Savings Scheme (ELSS) are mutual fund schemes investing in equity markets along with providing tax benefits. 

On the other hand, Fixed Deposits (FD) are the term deposits with predefined tenure & interest rates offered by banks, post offices, corporations, etc.


ELSS funds involve moderate to high levels of risks due to their investments in equity markets and are recommended for investors having a high-risk appetite. On the other hand, FDs involve lower levels of risk. However, FDs are also exposed to liquidity risks, default risks, risks due to inflation. FDs are recommended to investors looking for low-risk avenues to park their savings.

Also, bank defaults usually occur in very rare circumstances. In case of any defaults, DICGC provides insurance coverage on the deposit along with the interest of up to Rs. 5 Lacs per investor.

Lock-in Term

ELSS has a lock-in tenure of 3 years which is lowest among all the tax-saving investments available in the market.

Whereas, lock-in tenure of FDs is flexible as per the chosen tenure of investment. However, there is a minimum lock-in period of 5 years for tax-saving FDs.  


Investments in ELSS cannot be liquidated before the completion of the lock-in period.

On the other hand, FDs can be liquidated at any time (as per the withdrawal rules) except for tax-saver FDs, which can be liquidated only after five years.


Loans cannot be availed against investments in ELSS schemes. 

Whereas, investors are allowed to avail loans against fixed deposits. However, one cannot avail loans against tax-saver FDs.

Tax Benefits 

Investments in ELSS schemes provide tax benefits of up to Rs.1.5 lacs under Section 80C of IT Act, 1961. The gains over & above Rs.1 lacs are taxed with 10% LTCG Tax. 

Investments in regular FDs do not provide any tax benefits. Only the 5 Year Tax-saving FDs provide tax benefits under Section 80C of IT Act.

Credit Card Availability

Credit cards cannot be availed against ELSS investments as well as tax-saving FDs. 

However, one can avail credit cards against regular FDs which would also help investors in improving their credit score.

NatureEquity Mutual Funds which are diversified in natureFixed Income mode of investment
Risks Moderate to HighLow

Higher returns. Vary across schemes.

12-15% (expected) on long term investments.

Lower returns. Varies across institutions & tenures.


Lock-in Term3 years

Flexible for regular FDs.

5 years for tax saving FD.

LiquidityCannot be liquidated before the term completion.Can be liquidated at any moment except tax saver FDs, which get liquidated after 5 years
Loan Availing FacilityNot AvailableAvailable in regular FDs.
Tax Benefits

Deduction under Section 80 (C), up to Rs. 1.5 lakhs.

10% Long Term Capital Gains (LTCG) Tax for gains above Rs.1 lakh.

Can be claimed for a tax deduction under Section 80C of Income Tax Act, 1961 for an amount up to Rs. 1,50,000
Credit Card FacilityCannot be availedCan be availed against regular  FDs. Cannot be availed against tax saving FDs.


Both the investment options are highly popular among investors. They carry different risk-return characteristics. Fixed Deposits are the most common form of investments among the households in India. Investors looking for stable returns can park their savings for the tenure as per their requirements. ELSS schemes are preferable for the investor’s tax-saving needs. Otherwise, an investor willing to take the risk of equity could consider investing in other equity mutual fund categories suitable to an investor's risk-return profile.

For tax saving purposes, ELSS & 5 Year FDs could be considered as per the risk appetite of the investor. Investors willing to take risks for higher returns can consider investing in ELSS whereas the ones with low-risk preferences can go for 5 Year FDs offering stable returns. 

Frequently Asked Questions About ELSS Vs FD

Q. What are the returns offered by ELSS and FD?

A. FDs have a fixed rate of return associated with them. The fixed rate varies with the tenure of the deposit. But, the interest rate varies from 3.5% to 6.5%. While ELSS does not have a fixed rate of return. In ELSS, the money is invested in the stock markets and therefore, the returns are market-linked. ELSS funds have the potential to offer good returns over the long term. The returns can be up to 12%-14% p.a. for the long investment tenures such as 5-10 years. 

Q. What is the lock-in period for FD and ELSS?

A. ELSS funds have a lock-in period of 3 years while tax-saving FDs have a minimum lock-in period of 5 years. 

Q. Does the FD also give tax benefits like ELSS?

A. Yes, FDs also give tax benefits like ELSS funds. However, to claim the tax deduction for the FD investment, the tenure of the FD should be equal to or more than 5 years. Investors can claim tax deductions of the deposited amount up to Rs.1.5 lakh per financial year under Section 80C of the Income Tax Act, 1961. 

Q. Do the FD and ELSS schemes offer premature withdrawal?

A. The general FDs offer the premature withdrawal facility. The amount invested in the FDs can be withdrawn before maturity by paying the applicable penalty. In the case of ELSS, as it is a tax-saving investment, it does not provide the facility of premature withdrawals. The amount invested in ELSS can only be withdrawn after the maturity or lock-in period. Similarly, in the case of Tax-saving FDs, premature withdrawals are not allowed.

More Information:

Bank of Baroda Fixed Deposit Interest Rates

Bank of India FD Interest Rates

Canara Bank FD Interest Rates

Get Investment Advice from India's Top Experts