ELSS vs PPF: Which of these Tax Saving Investments Should You Choose?

If you want to build a savings corpus while shaving the money that goes off as income tax– Section 80C of the IT Act gives you a few options. PPF and ELSS are two attractive options that you can consider in this regard. But which one is a better choice? Here’s what you need to know before deciding on one of them.

PPF (Public Provident Fund): 7 Features You Must Know Before Investing

The Public Provident Fund (PPF) is a government-backed savings scheme that you can use to build a savings corpus that can serve as your retirement. It is similar to the Employees Provident Fund (EPF)– you can use it to build a retirement corpus.

As per this plan, you can create a public provident fund account, into which you deposit an amount every month. You have to keep up with the monthly deposits for at least 15 years.

The deposit during the year can be factored as Section 80C Tax deductions. Here is a quick overview of the features of PPF.

1. Investment Limits

A minimum investment of Rs 500 and a maximum of Rs 1.5 lakh for each financial year is permitted. The maximum number of instalments for investments is 12.

2. Opening Balance

You can start a PPF account with just ₹100 rupees deposit each year. Please note that If your annual investments are more than ₹1.5 lakh, it will not accrue interest, nor would it qualify for tax deductions.

3. Deposit Frequency and Method

You must make at least one deposit every year for 15 years. You can transfer the amount as cash, cheque or demand draft.

4. Nominees and Joint Accounts

You can add a nominee to your account at any point in time. But the account can be held only by one person. Shared accounts are not permitted.

5. Risk

PPF is a government-backed savings instrument and it is risk-free. The risk of maintaining a PPF account is negligible.

6. Withdrawal and Partial Withdrawal

Due to the fixed nature of PPF account returns, they are utilised to diversify an investor's portfolio. The PPF interest and maturity amount are exempt from taxation under section 80C of the Income Tax Act of 1961. 

Beginning with the sixth fiscal year, a portion of the PPF can be withdrawn.

7. Interest Rate

The current PPF annual compounded interest rate is 7.1% per year.

ELSS (Equity Linked Savings Scheme): All You Need to Know 

Equity Linked Saving Scheme is a kind of diversified equity scheme. This mutual fund is used to invest in.

1. High Returns

Among tax-saving solutions, ELSS has produced one of the greatest returns. In the previous three and five years, ELSS plans have delivered returns between 11–14%. However, because ELSS returns are tied to the market, they are not guaranteed.

2. Tax Benefits Under Section 80C

Under section 80C of the Income Tax Act of 1961, ELSS investments up to Rs.1 lakh per year are eligible for tax deduction advantages. Investing in ELSS may be eligible for tax benefits of up to Rs 46,800.

In contrast to PPF, which is tax-free at every stage (even PPF returns are tax-free), ELSS returns are taxed at 10% if the gain reaches Rs. 1 lakh per year.

3. Low Lock-in Period

ELSS investments have the lowest lock-in period in the tax-saving category at only three years, making them a relatively more liquid alternative. The redemption period for ELSS funds is only three years.

4. Option for Systematic Investment Plan (SIP)

You can begin investing in ELSS with as little as Rs. 500 per month using the Systematic Investment Plan (SIP). The SIP can be started and stopped at your convenience. It offers a great deal of flexibility and ease when making tiny but consistent investments.

ELSS vs PPF: Comparative Advantages of ELSS and PPF

Both PPF and ELSS help you save on tax, but you must choose between the two depending on your risk tolerance, investment horizon and return objectives.

Keep in mind that PPF and ELSS belong to two asset classes – they have different financial characteristics and behave differently in the marketplace. Here are the key differences you should consider when deciding between the ELSS and PPF.

But if you were to look at these instruments from the perspective of Tax Saving through Section 80C, comparing them is useful. 

Better Tax Benefits of PPF as opposed to ELSS

PPF is more tax-efficient than ELSS when it comes to Section 80C due to the tax-free nature of its maturity proceeds. 

ELSS has a low tax liability and can be considered the second-best option in this regard.

ELSS capital gains of up to Rs 1 lakh each fiscal year are exempt from taxation. Gains on investments above Rs 1 lakh are subject to a 10% tax. 

Investors can optimise their tax benefits by reaping tax-free capital gains (up to Rs 1 lakh) annually after the lock-in period and reinvesting in ELSS to get Section 80C tax savings.

Better Liquidity of ELSS in Comparison to PPF

Many investors place a significant emphasis on liquidity. 

Tax savings do not need to lock up your funds for extended periods of time. 

The minimum PPF tenure is 15 years, extendable in 5-year increments. After a 7-year lock-in, withdrawals of up to 50 per cent of the fourth-year balance are authorised. PPF also offers lending options under certain conditions. 

ELSS mutual funds are the most liquid investments under section 80C. 

After the three-year lock-in period has expired, you can redeem your ELSS units in whole or in part. However, it should be noted that you are not required to redeem your ELSS units following the expiration of the lock-in period.

Here is a quick comparison chart between the two.

Feature	PPF	ELSS
Taxation	₹1.5L exempt	₹1.5L exempt, 10% for returns above ₹1L
Lock-in	15 years	3 years
Returns	7.9% (2019)	Dependent on equity market performance.
Lumpsum Investment	Yes	Yes
Other forms of Investment	Max. 12 instalments per year	SIPs
Risk	Risk-free	Market Linked
Loan Facility	Can take after 3 years.	Partially after 3-year lock-in

Who is PPF For?

PPF is appropriate for risk-averse individuals who can afford a 15-year lock-in term. If you don’t want to worry about short-term risks, PPF is the best option for you. 

All you need to do is to set up a PPF account with a bank of your choice and arrange for a standing order for a fixed sum to be transferred.

Who is ELSS for?

ELSS can be chosen by investors who are ready to accept a reasonable amount of risk in exchange for better returns. The most effective strategy to minimise risk in ELSS is to invest long-term.

How Can NoBroker Help

A sure-shot investment strategy is to maintain a diversified investment basket. 

If you have not considered investing in Real Estate yet, Get in touch with NoBroker’s Team of Real Estate Experts. You will get all the help you need to figure out what you need to invest in to ensure the best real estate investments.

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