Many people ask which is the best tax saving option between ELSS and PPF. Let us differentiate between ELSS Vs PPF for tax saving and getting the best returns.
ELSS (Equity Linked Savings Scheme) and public provident fund PPF, both help you save taxes, but apart from that, they differ on many parameters. ELSS investment relies on equity and has higher volatility compared to PPF which is a debt instrument with negligible volatility.
With both ELSS and PPF, you can get a maximum deduction of INR 1.5 Lakh under Section 80C of the Income Tax Act, 1961.
Many people ask about PPF vs ELSS for making tax-saving investment decisions. So, let’s understand and compare ELSS mutual funds and PPF for their suitability.
ELSS is the tax saving mutual fund which serves both the purpose of saving taxes and help you create long term wealth. ELSS funds generate returns by primarily investing in equity and equity-related instruments. This makes it a suitable investment option for a person with long term goals. You get a combination of the highest gain of 12% and above, as well as the lowest lock-in period of 3 years by investing in ELSS, which is the best investment option when compared to other options with tax deductions under Section 80C of the Income Tax Act, 1961.
Plus, you also get a diversified equity portfolio by investing as low as INR 500 per month.
What is Public Provident Fund (PPF)?
PPF is a Government of India backed debt asset, suitable for long terms financial goals such as children’s education and retirement planning. By investing in PPF, you can claim tax deductions under section 80C up to Rs 1.5 lakh. PPF carries a longer lock-in period of 15 years which can further be extended for another 5 but, there is a facility of premature withdrawal from 6th year onwards.
You can also avail of a loan on your PPF account and that facility is available from the 3rd to the end of the 6th financial year. The loan amount is set at 25% of the outstanding balance amount of the two preceding years and needs to be repaid in 36 months. However, It is to be noted, that the interest charged is 2% over the present interest rate.
Difference Between ELSS and PPF
|Basis of Difference||ELSS||PPF|
|Risk||High Risk||Low/ No Risk|
|Returns||Market Linked||Fixed Returns|
|Lock in Period||3 Years||15 Years|
|Liquidity||High (withdrawal anytime after lock-in period)||Low (partial withdrawals after 5 years)|
|Tax on Returns||Taxable||Tax-free|
|Tax on maturity||Gains up to INR 1,00,000 are tax exempted.||Exempt|
|Premature Withdrawal||No partial withdrawals||Partial withdrawals after 5 years.|
Compare ELSS vs PPF
Below are the differences between ELSS and PPF:
Public Provident Fund PPF investment is low risk because it is backed by the Government of India. Hence, they are a better investment option for highly risk-averse investors.
ELSS funds, on the other hand, invest in equity and equity-related instruments and are exposed to market risks, which makes them a better investment option for those who are willing to risk volatility for the sake of long term gains.
The rate of interest on PPF investment is decided by the Government of India with the present rate being 7.9%.
The returns on ELSS depend on market movements. The 3-year annualized historical returns on ELSS funds are 12% and above. You can also use Scripbox’s SIP calculator and estimate the returns and wealth created.
3. Tax on Returns
PPF investments carry a tax benefit of the returns being totally tax-free. To estimate the returns and maturity you can use Scripbox’s PPF calculator.
In ELSS, gains of over INR 1 Lakh are considered long-term and are, therefore, taxed at the rate of 10%.
4. Lock-in Period
PPF investment has a lock-in period of 15 years, with an option to make a partial withdrawal after the completion of 5 years.
Equity linked saving schemes ELSS, carries a lock-in period of only 3 years. But you can keep the investment for a longer duration as well.
5. Time Horizon
You can invest for 15 years in a PPF account with an additional extension of 5 more years.
In ELSS investment, there is no time horizon and you can continue with the investment as long as you wish.
The funds collected in PPF are used by the Government where you can earn a fixed interest. Hence, there is no question of volatility.
ELSS funds are invested in equity and are subject to market fluctuations and volatility.
7. Offered Through
PPF is offered through banks and the post office. To invest, you would need to open a PPF account, followed by a KYC process. Plus you can even open a joint PPF account for and with a minor.
ELSS is managed by a fund manager and offered by the mutual fund house. Hence, you can invest directly through the AMC website, online investment portals or through Demat agents and registrars.
In both investment options, PPF and ELSS the contribution can be monthly or in a lump sum.
In PPF, the minimum investment amount is INR 500. On the other hand, the maximum is INR. 1.5 Lakhs for every financial year.
In ELSS, the monthly payments are known as Systematic Investment Plans (SIP). In SIP you can start investing with INR 500 and there is no upper limit of investment. You can also check out the difference between SIP and lump sum mutual fund.
9. Premature Withdrawal Facility
You can partially withdraw money from your PPF account after the completion of 5 years of investment but there is no such provision to withdraw money from ELSS until the lock-in period of three years is over.
Read also about the Difference Between NSC and ELSS
PPF Vs ELSS: Which is Better?
As a taxpayer and an investor, it is up to you to decide what your investment goal and financial plan, how much risk you are willing to take, and more importantly, the time period you have in hand.
You should also make a note of the premature withdrawal option in mind. If you need any funds during the investment period, PPF offers a partial withdrawal window along with the added facility of taking a loan. You can withdraw 50% of the funds post the 5-year lock-in period, or can avail a loan in the 3rd year.
But in the case of ELSS, there are no partial withdrawals during the lock-in period. However, the lock-in period in ELSS is 3 years while investing in ppf bring a lock-in period of 15 years
Finally, before choosing any one, or both the options, you need to consider the financial plan and goal you have in mind and thus the returns that you are looking for. You can consider the differences between ELSS and PPF, before making an investment choice.
You can use the information above to make the right call for your investment and tax benefit needs. Additionally, you can use Scripbox’s mutual fund calculator and estimate the wealth created and returns. Besides, you can also use Scripbox’s PPF calculator and estimate the interest to be earned for the investments made.
you may also like to read about EPF vs PPF
Is PPF Still a Good Investment Option?
There are other tax savings investment schemes like tax saving fixed deposits, NPS, NSC, sukanya samriddhi yojana, etc that serve different investment goals. For instance, sukanya samriddhi yojana is a scheme focused on securing the future of a girl child. While NPS is a scheme focused on retirement benefit plans.
On the other hand, tax saving fixed deposits better suit investors who want to invest in a low or negligible investment option. Accordingly, PPF also serves the purpose of securing long term goals of investors. To summarize an investor must choose an investment option that best suits his own goals, financial plan, understanding of risk and expectation of returns.
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Top Performing ELSS Funds
Below are some of the best-recommended and top performing ELSS funds:
Mirae Asset Tax Saver Fund-Growth is recommended by Scripbox within the equity-linked tax saving mutual fund category. The fund holds a good rank on the basis of average 1 year rolling return – 23.69% and average 3 years rolling return – 20.91%. Returns were calculated based on 1 year and 3 years rolling returns rolled monthly for the last 4 years. Trailing returns have a recency bias and point to point returns are specific to the period in consideration. Rolling returns, on the other hand, measures the fund’s absolute and relative performance across all timescales, without bias. The fund is ranked 2 based on the quarterly outperformance count in the category. Out of 16 quarters the fund has outperformed the category average 12 times.
Scripbox recommends DSP Tax Saver Fund (Growth) within the equity-linked tax saving mutual fund category. The fund holds a good rank on the basis of average 1 year rolling return – 22.04% and average 3 years rolling return – 19.01%. Returns were calculated based on 1 year and 3 years rolling returns rolled monthly for the last 4 years. Trailing returns have a recency bias and point to point returns are specific to the period in consideration. Rolling returns, on the other hand, measures the fund’s absolute and relative performance across all timescales, without bias.
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Invest in a scientifically curated set of tax saving (ELSS) funds to help you save tax under Sec. 80C and also grow your wealth through equity.