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Equity Linked Savings Scheme and Public Provident Fund are savings schemes for tax benefits. As an investor, you can invest in either of the schemes or both.

What is ELSS?

Equity Linked Savings Scheme is a type of mutual fund investment scheme which is eligible for tax benefits under Section 80C of the Income Tax Act, 1961. ELSS offers dual benefits of tax-saving and market linked wealth creation in the long run. It comes with a lock-in period of 3 years. Investors with a higher risk tolerance often select ELSS over PPF. Being a mutual fund, a significant portion of the fund goes into equities. Equities are subject to market risk and volatility. Also, some of the best ELSS funds have delivered better returns in the past in comparison to PPF and FD.

Benefits of Investing in ELSS

  • Good Returns: ELSS has delivered the highest returns in the tax saving category. ELSS schemes have generated about 11-14% returns in 3-years and 5-years’ time frame.
  • Tax Benefit: Investments upto Rs.1.5 lakh a year in ELSS are eligible for tax deduction under Section 80C of the Income Tax Act, 1961. An investor can avail tax benefits upto Rs. 46,800 by investing in ELSS. Note: 10% LTCG tax is applicable if the gains exceed Rs. 1 lakh in a financial year.
  • Lock-in Period: ELSS mutual funds come with a minimum lock-in period of 3 years. This offers liquidity as you can withdraw your ELSS fund investment after just 3 years. Also, you can continue to stay invested in ELSS even after the completion of the lock-in period of three years.
  • SIP Option: You can invest in an ELSS mutual fund via Systematic Investment Plan. The SIP amount can be as minimum as Rs. 500 or Rs. 100. Also, you can start and stop the SIP when convenient.

Benefits of Investing in PPF

  • Tax Saving - Investment made towards a PPF account is eligible for tax deductions up to Rs. 1,50,000 under Section 80C of the Income Tax Act, 1961.
  • Nomination - PPF comes with a facility of nomination. The legal heir gets the amount in the fund at the demise of the account holder.
  • Low Risk - PPF is a risk free investment backed by the government of India.
  • The minimum investment amount for a PPF is Rs. 500 and the maximum investment amount in a year is Rs. 1,50,000.
  • The interest you receive and the amount at the time of maturity is free from taxation.
  • The interest rate on PPF is fixed by the government on a quarterly basis. The average returns on PPF for the last 5 years have been around 8%.

Difference Between ELSS and PPF

Category PPF (Public Provident Fund) ELSS (Equity-Linked Savings Scheme)
Risk Backed by the Government of India, PPF investments are safe ELSS is an equity mutual fund which are subject to market risks
Returns The interest rate of return is declared by the government of India every year. It is currently between 7% and 8% p.a. ELSS is a market-linked instrument. The returns depend on the scheme selected and vary between 12%-14% approximately
Tax Benefits? EEE (Exempt Exempt Exempt) PPF is exempt from taxes at the time of investment, accumulation, and withdrawal ELSS is subject to 10% LTCG tax if the returns are over and above Rs. 1 lakh after a period of 1 year
Lock-in Period 15 years. (Post the 5th year partial withdrawals are permitted) ELSS investments have a lock-in period of 3 years. There is no possibility of premature withdrawal
Investment Duration You can invest for more than 15 years. However, you cannot extend the investment to more than 5 years ELSS investments have no upper time limits
Investment Amount You can invest between Rs. 500 and Rs. 1,50,000 in a financial year in a lump sum or in 12 installments No such limit on maximum amount. Under Section 80C of the Income Tax Act,1961, only Rs. 1,50,000 in a financial year is deductible

Returns in ELSS vs PPF

In comparison, ELSS offers higher returns than PPF. PPF is suited for individuals who are absolutely risk-averse and can afford a 15-year lock-in period. Investors who are willing to take a moderate risk to earn higher returns can opt for ELSS.