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 PPF (Public Provident Fund), 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 fund and PPF for their suitability.
ELSS is the only 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 tax saving options 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.
PPF is a Government of India backed debt asset, suitable for long term financial goals such as children’s education and retirement planning.
PPF carries a longer lock-in period of 15 years which can further be extended for another 5 but, there is a facility of partial withdrawal from 6th year onwards.
You can also avail 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.
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.
The returns on PPF investments are totally tax-free.
In ELSS, gains of over INR 1 Lakh are considered long term capital gains and are, therefore, taxed at the rate of 10%.
PPF investment has a lock-in period of 15 years, with an option to make a partial withdrawal after the completion of 5 years.
ELSS, however, carries a lock-in period of only 3 years but you can keep the investment for a longer duration as well.
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.
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 are offered by the mutual fund house which is why you can invest directly through the AMC website, online MF investment portals or through Demat agents and registrars.
In both investment options, the contribution can be monthly or in a lump sum.
In PPF, the minimum investment amount is INR 500 and the maximum is INR. 1.5 Lakhs for every financial year.
In ELSS, the monthly payments are known as Systematic Investment Plans (SIP) in which 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.
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.
Both PPF and ELSS are great tax saving options but with different goals. PPF comes with zero volatility and risk at the cost of returns whereas ELSS with its inflation-beating returns is great for long term goals. However, you will see the volatility of an equity investment when you invest in ELSS.
As a taxpayer and an investor, it is up to you to decide what your investment goals are, 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 which is less compared to that of PPF.
Finally, before choosing anyone, or both the options, you need to consider the goals you have in mind and thus the returns that you are looking for. You can use the information above to make the right call for your investment and tax-saving needs.
Below are some of the best-recommended and top performing ELSS funds:
|Motilal Oswal Long Term Equity Fund – Regular Plan-Growth||Tax Saving|
|Mirae Asset Tax Saver Fund -Regular Plan-Growth||Tax Saving|
You would also like to read – how to invest in ELSS mutual funds
Check out best investment option between mutual funds vs stocks
Taxation on mutual funds is a complex topic. Taxes paid on your mutual fund investments vastly depend on factors such as what kind of funds you have invested in, the duration of your investment, which income tax slab you belong to and so on.