Why ELSS is better than PPF? A Quick Guide

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If you are looking to make some investments to save tax, then you would have most certainly come across Section 80C of the Income Tax Act.

This section offers tax deduction for investments made in certain financial instruments like Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), Tax saving FD, National Pension Scheme (NPS), etc. Each of these investment options have different features but one thing in common – tax benefits. Aligning one or more of these investments with your financial objectives can offer a dual benefit of wealth creation and tax saving.

What is ELSS?

ELSS schemes are a category of mutual funds promoted by the government in order to encourage long term equity investments. Under this scheme, most of the fund corpus is invested in equities or equity-related products.

Types of ELSS:

There are two categories in ELSS mutual funds i.e. dividend and growth.
 
The dividend fund is further divided into Dividend Payout and Dividend Reinvestment. however,under the dividend reinvestment option, the dividend is reinvested as a fresh investment to purchase more shares.

Under the growth option, an investor can look for longterm wealth creation. It works like a cumulative option whose full value is realized on redemption of the fund.

What is the lock-in period in ELSS?

ELSS funds have a lock-in period of three years. When compared to EPF, PPF, NSC and other investments under Section 80C, ELSS has the shortest lock-in period.

What are the risks involved in ELSS funds?

ELSS mutual funds do not have ironclad guarantee over returns, as they generate their earnings from investments in the equity market. Nevertheless, some of the best­ performing ELSS mutual funds have given  consistent and inflation beating returns in the long run. This quality is not possessed by the other fixed income tax­ saving investments like PPF and FD.

 

Public Provident Fund (PPF)

PPF is a savings and investment scheme by the Government of India offering a fixed rate of interest. The maturity period of these investments is 15 years and an investor has to make a minimum yearly deposit of 500. The maximum amount of investment in a financial year is 150,000 which offers tax deduction under Section 80C.

ELSS vs. PPF

Particulars PPF

(Public Provident Fund)

ELSS

(Equity Linked Savings Scheme)

What is the risk involved? Being backed by the Government of India, PPF investments are very safe. Being an equity fund, the investments are subject to market risks.
What returns can I expect? The Government declares the rate of interest for PPF investments every year. It is usually between 7 and 8% p.a. Being market-linked, the returns can vary depending on the scheme selected but an investor can expect an approximate return of 12-14%.
Is there any lock-in period? Investment is locked in for a period of 15 years.

(After the 5th year partial withdrawals are permitted)

ELSS investments have a lock-in period of 3 years with no possibility of premature withdrawal.
Is there a maximum time limit for investment? PPF investments cannot be made for more than 15 years. ELSS investments have no upper time limits.
How much can I invest? You can invest anything between 500 and 150,000 in a financial year, either in lump sum or in 12 instalments. You can invest as much as you want. However, under Section 80C of the Income Tax Act, only 150,000 in a financial year will be allowed for tax deduction.
Conclusion

ELSS mutual fund investment has now become a popular tax saving investment under Section 80C, and it is also ideal for retirement planning and wealth creation coupled with the benefits of lower lock-in period, SIP method of investment, rupee cost averaging risk.

ELSS funds should be taken into account by every investor while planning their investment goals.

With the tax benefits being the same, ELSS certainly is a better tax saving alternative to PPF (provided you have the appetite for market volatility).

If you have any doubts, comment below..

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