Tax Saving Fixed Deposit and ELSS Funds explained


Besides the obvious PF contribution, Tax saving mutual funds and Tax saving fixed deposits are the most popular and sought after source to claim deductions under section 80c of the Income Tax act.

Even though both can be used to claim deductions, there are several differences between the two.

elss mutual funds


Fixed Deposits

Tax saving fixed deposits are like your regular fixed deposits except for they come with a lock in period of 5 years and be claimed for tax deductions.

Regular tax saving fixed deposits cannot be claimed for tax deductions.

The interest rate will vary from bank to bank.

KYC is required is to open your FD with a new bank, not required if you open your FD with your current bank.


Not Inflation protected

A tax saving fixed deposit is not inflation protected and it is the biggest drawback of a tax saving fixed deposit.

If the rate of your fixed deposit is 5% and over the period of the lock in period, say the average inflation is 6% then in such a case technically you did not gain 5% on your fixed deposit but in fact lost 1%.

Therefore in reality you don’t gain any real returns.

Inflation is a reality for all developing economies.

This is the reality for all fixed deposit schemes and not just for a tax saving fixed deposit.

This is precisely why for long term planning, investments that can outperform inflation are recommended.


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Capital protected

The capital of your tax saving fixed deposit is protected up to 5 lakh by the Deposit Insurance and Credit Guarantee Scheme.

This means no matter what, even under the most unforeseen of circumstances your capital amount is assured.

This of course does not apply to the capital amount beyond 5 lakhs.

Additional reading: Click Here to read why you should review your mutual fund portfolio yearly 


A tax saving fixed deposit cannot be withdrawn before the lock in period of 5 years under any circumstances.

Loan against the deposit is also not permitted.


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The interest gained on a tax saving fixed deposit is not tax free.

The interest from a tax saving fixed deposit is added to the total income of the individual.

The tax rate will therefore depend on the tax slab of the individual.

In reality therefore a tax saving fixed deposit is not at all favourable for someone who falls under the 30% tax bracket since the total interest gained after taxation is extremely low.


ELSS Mutual Funds

Equity Linked Savings Scheme, better known as ELSS Funds or Tax Saving Mutual Funds allow an individual or HUF to invest in a diversified equity mutual fund to claim a deduction up to Rs. 1.5 Lakhs under Section 80C of the Income Tax Act 1961.

These funds allow an investor to claim dual benefits of tax saving along with availing equity growth.


What are tax saving mutual funds?

Elss means tax saving mutual funds that allow tax deductions under 80c of the Income tax act.

Tax saving mutual funds have a short lock in period of 3 years as opposed to other tax saving instruments with lock in period ranging from 5 to 7 to 10 years.

Elss mutual funds is your best option since it provides both tax saving as well as capital appreciation.

To get the true benefits of elss funds, they should be first looked at as an investment and a tax-saving option.


Additional reading: Click Here to read about the various types of equity mutual funds

How does tax saver mutual fund work?

A tax saving mutual fund is similar to a flexi cap mutual fund in the sense that it does not have any restriction with regards to caps.

It is free to invest wherever it wishes to as long as 80% of the portfolio is invested in equities at all times.

It comes with a lock in period of 3 years, for sip each instalment would need to complete 3 years before you can withdraw it.

Since it comes with a lock in period of 3 years, fund managers have a sense of stability in terms of AUM which provides them with more room to take concentrated bets.

Every tax fund is managed differently from the other since there are no set rules as such.

Therefore, relying merely on past returns can be very harmful for your portfolio, instead a better understanding of the philosophy of the fund and your needs is what is required.


Are you investing in the right mutual funds?


Elss funds are taxed like any other equity mutual fund.

No tax is imposed for profits under Rs 1 lakh.

For profits exceeding Rs 1 lakh, 10% Long Term Capital Gains tax (LTCG) is imposed.

Short Term Capital Gains tax (STCG) cannot be imposed on tax saving mutual funds since they have a lock in period of 3 years so by default, they stay invested for more than a year.



You can withdraw your elss funds only after they have completed 3 years.

For SIP investments in tax saving funds, each sip instalment is considered as a fresh purchase and therefore each SIP instalment would need to complete 3 years.

No partial redemptions or transfers are allowed before the completion of 3 years.



Lowest lock in period

Elss funds have the lowest lock in period among all the tax saving instruments



Lock in period

Elss funds

3 years

Public Provident Fund

15 years

National Savings Certificate

6 years

Bank Fixed Deposits

5 years


A fixed deposit makes sense in the short term for emergency purposes since capital protection takes precedence over returns where emergency is concerned.

A tax saving fixed deposit on the other hand though makes little to no sense at all considering the real returns and the higher lock in period of 5 years.

In the long run an elss fund scores over a tax saving fixed deposit in various departments from beating inflation, higher returns and a shorter lock in period.


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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing

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