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ELSS vs PPF – Comparison of ELSS Funds with Public Provident Fund

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Taxes take away a substantial amount of your income. As an investor, you must weigh your options to get the best tax efficient investment funds available. At this juncture the decision with respect to ELSS vs PPF becomes critical.

  1. Introduction
  2. What is an Equity Linked Savings Scheme?
  3. Things to know about ELSS
  4. What is a Public Provident Fund?
  5. Things to know about PPF
  6. ELSS vs PPF
  7. Why Invest with ClearTax?
 

1. How ELSS and FD works under 80C?

It takes good financial planning on your part to make your savings meaningful and invest in schemes that give you the best results. The Government encourages individuals and households to invest and secure their financial futures by giving high tax rebates under Section 80C of the Income Tax Act. ELSS and FD are two of the many 80C investments you can make use of as an investor. This way, you can deduct Rs. 1.5 lakhs from your taxable income and claim exemptions accordingly. Both come with its set of pros and cons and caters to investors of different investment profiles. ELSS Vs PPF is a familiar debate in the investment world and let us explore that in detail here.

2. What is an Equity Linked Savings Scheme?

ELSS is the only tax-saving mutual fund stated under 80C investments. With its liquidity exposure and hence better scope for long-term wealth creation, people with more risk tolerance favor it. Major portion of the investment in ELSS goes to equities and the performance is market-linked.  Hence, the returns are subject to market volatility. Yet, it has proved to be rewarding in the longer run. Some of the best ELSS funds have also delivered better returns in the past compared to other more traditional investing avenues like PPF and FD.   

3. Things to know about ELSS

a. Only contributions of up to ₹1,50,000 are tax-exempt under the Income Tax Act, Section 80C. b. It is one of the best investment options that offer tax benefits with potentially higher returns and a much shorter lock-in period. c. The return on ELSS is not tax-exempt anymore as per the Budget 2018 guidelines. 10% LTCG tax is applicable, if the gains exceed 1 lakh. d. You can continue to invest in this scheme even after the completion of the lock-in period of 3 years. e. The risk involved with ELSS is higher when compared to a Fixed Deposit or a PPF but the returns are potentially higher as well. ELSS, PPF

4. What is a Public Provident Fund?

Government of India introduced PPF to encourage people to save and make provisions for old age. The scheme is available for all the citizens of India except NRIs. You may also open a joint PPF account for a minor as well with the parent or a legal guardian.

5. Things to know about PPF

a. You can claim deductions up to ₹1,50,000 under Section 80C of the Income Tax Act for the investments that you make towards your Public Provident Fund account. b. You can nominate someone in your PPF account and in case of no nominations, the rightful legal heir gets the amount in the fund at the demise of the account holder. c. The interest rate for PPF for the year 2018-19 is 8%. The Central Government declares the PPF rate every year. d. There can be only one PPF account in your name (including joint accounts). e. You can choose to make the deposits to you PPF either in 12 installments or a lump-sum deposit annually. f. There is provision to make partial withdrawals from your PPF account from the 6th year. However, you get the entire corpus only after maturity period of 15 years. g. PPF is a risk-free investment, backed by the Government of India. h. There is a minimum investment amount for a PPF account which is a sum of ₹500. The maximum amount for depositing in a PPF in a year is ₹1,50,000. i. The mandatory lock-in period for a PPF is 15 years. However, you can  extend this for another 5 years after the mandatory lock-in period. j. The interest that you receive on the amount at the time of maturity is free from taxation.

6. ELSS vs PPF

Both PPF and ELSS offer great tax saving options. And as an investor, it is for you to decide which one to use or to invest in both. Start with your investment objectives. Contemplate how much risk you are willing to take on your investment, investment horizon, and the investment amount. One important point to consider would be the premature withdrawal option. While PPF does allow for 50% withdrawal of funds post the 5 year lock-in period, ELSS doesn’t allow partial withdrawals in between. You have to wait till you complete three years. So, weigh in the rates of interest aspect as well as the time horizon factor before you decide.  ELSS

Here is a quick overview of the pros and cons of investing in ELSS vs PPF:

Particulars

PPF

(Public Provident Fund)

ELSS

(Equity-Linked Savings Scheme)

What is the risk involved? As a Government of India initiative, PPF investments are 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 12%-14%  returns approximately. 
What are the tax benefits? EEE (Exempt Exempt Exempt) – The invested amount is exempt from taxes at the time of investment, accumulation, and withdrawal. There is a 10% LTCG tax applicable if your returns are over and above 1 lakh after holding period of 1 year.
Lock-in period Yes, a lock-in period of 15 years applies. (After the 5th year partial withdrawals are permitted) ELSS investments have a lock-in period of 3 years. However, there is no possibility of premature withdrawal.
Time limit for investment? You cannot invest for more than 15 years. However, you can extend to 5 more 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 a lump sum or in 12 installments. You can invest as much as you want. However, under Section 80C of the Income Tax Act, only ₹150,000 in a financial year is deductable.
From the table above, you can see that a PPF investment is a relatively safer option. But they do offer lower returns and longer time horizon than ELSS. The tax benefits and capital safety are more in favor of PPF; ELSS certainly is an option for better returns. It depends on whether you have the appetite for market volatility or not. 

7. Why Invest with ClearTax?

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