As both ELSS and PPF schemes help an investor to save tax with the potential of capital appreciation, there is always an element of confusion in choosing the right investment options for one’s portfolio. While both investment options have their own pros and cons, it’s important to understand which type of investment works best for your portfolio. This article aims at helping you choose the right investment option for your investment portfolio.
What is ELSS?
Equity-Linked Savings Scheme, commonly known as ELSS are tax-saving mutual funds that invest a majority of their assets in equity and equity-linked investments. Thanks to their tax-saving abilities of up to Rs 1.5 lac under Section 80C of the IT act, these mutual funds are commonly referred to as ELSS tax saving mutual funds.\
As an investor can save up to Rs 46,800 by investing in ELSS mutual funds provided that you fall in the highest tax bracket. ELSS funds are also accompanied by a mandatory lock-in period of three years. This happens to be the shortest lock-in duration among other Section 80C investments. These funds provide investors with the dual benefits of capital appreciation and tax-saving benefits.
What is PPF?
Public Provident Fund, also known as PPF is a savings scheme that is backed by the government of India. These savings schemes provide a fixed and predetermined rate of interest to investors which are revised by the government on a quarterly basis.
It is one of the most widely availed long-term investment options owing to its combined benefits of safety, returns, and tax-saving attributes. PPF savings schemes have a maturity period of 15 years. Similar to ELSS investments, the amount invested in PPF can be claimed u/s 80C deductions of up to Rs1.5 lac.
ELSS vs PPF
The following table summarizes the differences between ELSS funds and PPF investments:
Basis of comparison
|Risk||Investments in ELSS are subject to market risks.||As PPF is backed by the Government of India, these tax-saving investments are relatively safe.|
|Returns||The returns on ELSS mutual funds vary depending on the scheme chosen. However, an investor can expect annual returns at around 12% to 14% when invested for a long duration.||The Indian government announces the rate of interest for PPF investments each year. It is usually between 7% to 8% p.a.|
|Tax benefits||ELSS investments are subject to long-term capital gains (LTCG) which are taxed at 10% p.a. for gains above Rs 1 lac.||PPF schemes enjoy EEE benefits (Exempt Exempt Exempt) – This means that the invested amount is exempt from taxes at the time of investment, accumulation, and redemption.|
|Lock-in period||ELSS investments have a mandatory lock-in tenure of 3 years and one cannot make premature withdrawals.||PPF schemes have a lock-in duration of 15 years. However, after the 5th year, partial withdrawals can be made|
|Investment horizon||You can invest in ELSS for ‘n’ no of years. There is no upper limit, just a minimum of three years||PPF schemes have an investment horizon of fifteen years. However, one can extend to five more years.|
Whether you decide to invest in ELSS or PPF must entirely depend on your financial goals, investment horizon, and risk profile. If you are a risk-averse investor, you might consider investing in PPF schemes for the additional stability it provides.
However, if you are comfortable riding the volatility associated with equity markets for higher returns, you might want to invest in ELSS funds.