There are various investment schemes that not only give you good returns in the long term but are also eligible to claim tax deductions helping you to reduce your tax liability while saving your money. ELSS and PPF are two very popular tax-saving investment options, but which one is right for you?
Here you need to understand the key differences between ELSS and PPF, and which one can give you maximum benefits in terms of better returns with low tax liability. This will help you choose the right one as per investment objectives like expectations of returns within a specified period while reducing your tax burden and capability to take the risk of investing in such schemes.
What are ELSS funds in Mutual Funds?
Equity-linked savings scheme (ELSS) is simply a type of mutual fund offered by mutual fund houses and asset management companies that provides tax benefits to investors. Most of the corpus in this fund is invested in equities or equity-related instruments with a minimum portion in other securities.
There is a 3-year lock-in period in ELSS funds, which means before that you cannot withdraw or liquidate your investments. However, you can claim tax deductions of up to Rs 1.5 lakh under section 80C of the Income Tax Act. It is a stock market-linked investment plan where you will get returns as per the movement of the market and performance of the underlying securities included in the ELSS funds.
Recommended Read: How to invest in ELSS Funds?
What is the PPF Investment Scheme?
Public provident fund (PPF) is a type of saving scheme backed by the government where you can invest at regular intervals and get a high rate of returns compared to other banks related saving schemes. You can open a PPF account with a minimum investment of Rs 500 and the maximum amount you can invest is Rs 1.5 lakh.
The lock-in period for investing in PPF is 15 years and you can extend it further for five more years. Investing in PPF is also eligible for the tax exemption under section 80C. You cannot withdraw prematurely, however you can partially withdraw from your PPF account after five years.
Difference between ELSS and PPF:
| Aspects | ELSS | ELSS |
| Scheme Type | This is a mutual fund investment scheme linked with equity-related investable instruments offered by AMCs and mutual fund houses. | It is a type of recurring deposit bank account opened in banks where you can invest at regular intervals and earn interest. |
| How to Invest | Open a demat account and choose the right mutual fund company or broking house to invest in the ELSS as per the investment plans.
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You have to open a PPF account with a designated bank or NBFCs where you can regularly deposit the money as per the schemes. |
| Minimum Amount | Minimum investment starts with Rs. 500 per month if you choose through SIP. | You can start it with a minimum of Rs 500 per year with a maximum limit of Rs 1.5 lakh p.a. |
| Lock-in Period | The lock-in period is 3 years after that you can redeem your funds or continue till the fund scheme runs. | The minimum lock-in period in this deposit scheme is 15 years and you can further extend up to 5 years. |
| Benefit of Tax | The tax benefit of up to Rs. 1.5 lakh under section 80C but if exceeds Rs.1 lakh, taxed under LTCG. | Tax deduction is available under section 80C and interest earned and maturity amount is tax-free. |
| Risk Level | The risk level is high as it is directly linked to the stock market and the returns can be affected. | Highly safe or no risk, as supported by the Government of India and returns are predefined. |
| Returns Potential | The returns on such funds directly depend on the performance of the stock market. And you can expect an average of 12% to 14% of annual returns. | Get assured returns as with the predefined rate of interest paid at the time of maturity. Here the interest rates usually remain around 7% to 8% per annum. |
| Service Providers | Mutual fund houses and AMCs offer these types of investment schemes. | Designated banks and NBFCs like post offices are allowed to open PPF account. |
| Withdrawal Facility | Under this scheme, you are not allowed to withdraw your money before 3 years. | Under this scheme, you can only withdraw only after 5 years with certain conditions. |
ELSS or PPF: Which is better for you?
Both investment options offer tax benefits under the same section of the Income Tax Act, but there are certain aspects that make both schemes completely different from each other. ELSS is a type of mutual fund plan, linked to equity-related underlying securities, while PPF is a type of bank deposit or recurring deposit scheme.
Returns: The return on the previous one (ELSS) is completely dependent on the performance of the stock market or the equities included in the fund. But the rate of returns on PPF is fixed and that is paid at the time of maturity.
Risks: ELSS is high risk in terms of getting assured returns, as market volatility can affect the performance of the fund or securities included. While PPF is completely safe, and backed by Indian government, hence you will get assured returns in terms of interest paid along with your principal amount.
Taxation: Though, while in investing in both types of schemes you can claim tax deductions but profit earned from ELSS is taxed as LTCG, while the amount or interest earned from depositing in the PPF account is completely free from any tax liability.
Maturity: However, you can withdraw your money after 3 years from ELSS or continue investing for long years to get more benefits or high rate returns with stock market movement. To enjoy the full rate of interest on PPF deposits you have to wait for at least 15 years, however, you can partially withdraw some of the funds in case of emergencies but it can affect the rate of interest originally about to be paid.
Recommended Read: How to plan your ELSS Investments during the year?
Conclusion
ELSS and PPF both could be one of the best tax saving schemes with their own pros and cons. If you want to take advantage of stock market movement with tax benefits and early maturity, then the previous could be a better option for you. But if you are looking to accumulate funds in banks for your post-retirement by investing at regular intervals with the highest rate of assured interest, then PPF would be more suitable.
In PPF, you cannot withdraw your full amount before 15 years but your fund will be completely safe. Investing in ELSS could be risky especially if you are expecting returns in the short term. Hence, the best way is to invest in both types of schemes to enjoy the full benefit of tax deductions, with balanced returns on your overall investment while taking advantage of both types of investment schemes.
Recommended Read: NPS Vs ELSS
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