One of the most significant aspects of financial planning is tax-saving. Investors are always looking out for investment schemes that help them to save taxes. When it comes to choosing the best tax saving scheme, there is a lot of confusion between two of the most popular financial instruments- PPF and ELSS.
While both PPF and ELSS are great tax saving schemes, they have entirely different goals. PPF comes with zero risks and volatility at the cost of returns, whereas ELSS with it's high returns is best for long term goals. However, investors have to bear the volatility of capital markets when they invest in ELSS.
In this post, we are going to compare both these options in more detail, in terms of meaning, features, benefits, etc., to make the choice easier for you.
Equity Linked Savings Scheme or ELSS are equity diversified mutual funds with a three-year lock-in, which means the investor cannot sell their investment before completion of three years from the date of purchase.
With their performance linked directly to the market, a significant portion of the ELSS investment goes towards equity, making the returns depend on market volatility.
Investments in ELSS up to Rs. 1.5 lakh per year qualify for income deductions under section 80C of the Income Tax Act, 1961. This means that you can deduct the amount you invest in an ELSS from the total income to reduce your taxable income and, hence taxes.
Let's understand this better with an example-
Varun is senior bank manager with a taxable income of Rs. 15 lakh a year. and comes in 30% tax bracket.
He decided to invest Rs. 1.5 lakh in an ELSS fund. Under 80C of the income tax act, this lowers down his taxable income to Rs. 13.5 lakh and translates into a saving of Rs. 46,800.
Introduced by the Government of India, Public Provident Fund (PPF) Is a pure debt product that offers assured returns to the investors. Apart from this, the scheme also provides added tax benefits u/s 80C. The PPF scheme is available for all the citizens of India except NRIs. The interest rates on PPF are set by the government on a quarterly basis.
While both PPF and ELSS are extremely tax-friendly instruments, the final choice should be based on parameters such as risk appetite, return expectations, and investment time horizon.
ELSS investments are subject to market risks, but still offer better wealth creation potential and more liquidity compared to PPF. PPF is generally suited for investors with zero risk appetite and willingness to invest in a scheme with a 15-year lock-in period. In contrast, investors who wish to earn higher returns and are willing to take a moderate amount of risk can opt for ELSS.
| Difference | PPF | ELSS |
|---|---|---|
| Return on investment | Moderate - Returns are fixed by the government every quarter | High - Linked to markets and grow over a long-term horizon |
| Safety | High - Government-backed | Low - Based on markets |
| Liquidity | Low - Partial withdrawal is allowed from 6th year onwards from account opening year | High - Can withdraw anytime after the lock-in period of 3 years |
| Lock-in period | 15 years | 3 years |
| Tax on returns and maturity | Completely exempt | 10% long term capital gains tax (initial 1 lakh is exempt from tax) |
