ELSS vs PPF – which one is better for tax savings?

Right from toothpaste to a phone, the world is full of choices. Sometimes it takes hours to merely decide the colour of a shirt lying in your online cart. Things get further confusing when it comes to investing your money. Your investments can secure your future and fulfil your goals. Therefore, making the right choice is critical. Two investments – Equity-Linked Savings Scheme (ELSS) and Public Provident Fund (PPF) are often pitted against each other. But who wins the tax battle in ELSS vs PPF? Let’s find out.

The PPF or ELSS conundrum requires more context for better investor understanding. Firstly, answering the question of is ELSS better than PPF, ELSS funds have gained significant popularity among Indian investors as a tax-saving investment option as these schemes offer the dual benefit of potential capital appreciation through equity investments and tax savings under Section 80C of the Income Tax Act.

When thinking of ELSS mutual funds vs PPF, you must understand the key differences which will help you take the right decision. So, is ELSS better than PPF? PPF is a government-backed savings scheme with a fixed interest rate, while ELSS funds are equity-oriented mutual funds with potential market-linked returns. PPF offers a long-term investment tenure of 15 years, while ELSS funds have a lock-in period of only three years, making them more flexible in terms of liquidity.

The PPF or ELSS consideration comes with another important aspect that you should consider. ELSS funds have the potential to deliver higher returns compared to PPF over the long term, due to their equity exposure. However, they also carry higher market risks. PPF, on the other hand, provides a fixed and predictable return, suitable for risk-averse investors. Let us understand these aspects in detail –

What are ELSS funds?

ELSS funds are a type of mutual fund that primarily invests in equity and equity-related securities. They are the only mutual funds that have a lock-in period of three years and offer tax savings under Section 80C of the Income Tax Act, 1961.

What is PPF investment?

PPF is a government-backed retirement savings scheme. It is a long-term savings plan with a minimum tenure of 15 years. PPF is undoubtedly one of the most commonly used savings schemes in the country that features in the list of tax saving options under Section 80C.

ELSS vs PPF – Let’s talk tax

ELSS and PPF are two tax saving options that allow you to claim a tax deduction of up to Rs 1.5 lakh per annum on your investments. However, the tax treatment of their gains differs. The returns from an ELSS fund in excess of Rs 1 lakh/year attract a 10% long-term capital gains tax. On the other hand, PPF offers tax-free returns.

These were the basics of ELSS vs PPF. Now let’s move to their other differences.

ELSS and PPF – some differences

• Risk:

  Though ELSS funds have the potential to offer high returns, they carry high risks due to their equity nature. They are market-linked and may be ideal for investors with a high risk appetite looking for capital appreciation. On the other hand, PPF carries low risk and is not market-linked. It is backed by the government and offers guaranteed returns and capital protection.

• Liquidity: 

  ELSS funds have a lock-in period of only three years. However, the minimum tenure in a PPF is 15 years. While PPF does offer partial withdrawals and loans in some cases, it is primarily a long-term investment, and you would not be able to use its funds in most situations. Evidently, ELSS funds offer better liquidity among the two.

• Investment methods:

  You can invest in a PPF through your bank or the post office. You need to open a PPF account and can then invest money by cash, cheque or demand draft. The minimum investment for a PPF is Rs 500, and the maximum is Rs 1.5 lakh yearly.

ELSS funds are offered by an asset management company. You can invest in them online and offline through Systematic Investment Plans (SIPs) or in a lump sum. Usually, the minimum investment is Rs 500 for SIPs and Rs 1000 for a lump sum investment, while there is no maximum limit. You can use an SIP calculator to determine the right investment amount for your needs.

Conclusion

The ELSS vs PPF debate has a simple solution – invest as per your needs. If you have a high risk appetite and are looking for capital appreciation, choose ELSS funds. If you are looking for low risk and capital protection, you can select a PPF.

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