PPF vs. ELSS - What is better ?

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

Saving plays an important role in meeting the growing needs of individuals and families. But these savings are truly beneficial if they are able to meet your needs after beating inflation. Tax is an aspect that takes away a substantial amount of your income and therefore, as an investor, you must weigh your options for the best tax efficient investment options.

1. Introduction

It takes good financial planning on your part to make your savings meaningful and invest in schemes that give you the best results. Under the Income Tax Act, Section 80C, the Government of India encourages individuals and households to save and be better prepared for retirements and other contingencies in the future. The government has allowed an exemption on various investment schemes for individuals to claim as much as INR 1,50,000 in deductions on investments. We shall now look at two of such schemes: a. Equity Linked Savings Schemes (ELSS) b. Public Provident Fund (PPF)   

2. What is an Equity Linked Savings Scheme?

This is a type of mutual fund which enjoys tax exemption under Section 80C of the Income Tax Act. The major portion of the investment in the Equity Linked Savings Scheme, as the name suggests, is in the area of equities. The performance of these funds is dependent on the stock market as the returns from the ELSS are market linked. The returns are subject to market volatility but in the longer run, ELSS have been known to give better returns when compared to other more traditional investing options.  

3. Things to know about ELSS

a. You may invest any amount you like in an Equity Linked Savings Scheme but it is only contributions of up to INR 1,50,000 that 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 short lock-in periods. c. The returns on Equity Linked Savings Schemes are tax-exempt whether it is dividend income or capital appreciation. 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.

4. What is a Public Provident Fund?

The PPF investment scheme was introduced by the Government of India to encourage people to save and make provisions for old age. The scheme is available for all the citizens of India except for those who are Non-Residents. You may 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 INR 1,50,000 under Section 80C of the Income Tax Act for the investments that you make towards your Public Provident Fund account. The interest that you receive on the amount at the time of maturity is free from taxation. 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 2017-18 is 8 percent. The Central Government declares the PPF rate every year. d. You can have only one PPF account in your name and no joint accounts are allowed.e. You can choose to make the deposits to you PPF either in installments or a lump sum deposit. The installment, if you choose to opt for it, has to be made in a maximum of 12 times in a year. f. You are allowed to make partial withdrawals to your PPF account from the 6th year and the withdrawal of the entire amount is allowed at maturity which is 15 years. g. PPF is a risk-free investment that is backed by the Government of India. h. There is a minimum investment amount for a PPF account which is a sum of INR 500. The maximum amount for depositing in a PPF in a year is INR 1,50,000. i. The mandatory lock-in period for a PPF is 15 years. This can, however, be extended for lock-ins of 5 years after the mandatory lock-in period is complete.

6. ELSS vs. PPF

Both PPF and ELSS offer great tax saving options and as an investor, it is for you to decide what your investment objectives are. Take into consideration how much risk you are willing to take on your investment, your investment horizon, and the amount that you wish to invest. One important point to consider would be the premature withdrawal option. While PPF does allow for 50 percent withdrawal of funds post the 5 year lock-in period, ELSS allows for complete withdrawal at the maturity of three years. Weigh in the rates of interest aspect as well as the ELSS does not guarantee a fixed rate, unlike the PPF.

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?	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%.
What are the tax benefits?	EEE (Exempt Exempt Exempt) – The invested amount is exempt from taxes at the time of investment, accumulation, and withdrawal.	EEE (Exempt Exempt Exempt) – The invested amount is exempt from taxes at the time of investment, accumulation, and withdrawal.
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 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 will be allowed for a tax deduction.

From the table above, it can be seen that a PPF investment is a relatively safer option, but offers lower returns and longer time horizon as compared to ELSS. The tax benefits being the same, ELSS certainly is a better tax-saving alternative to PPF (provided you have the appetite for market volatility). For more insights on investments that meet your financial goals and objectives, visit Cleartax where we have customized mutual funds for every need.

[Courtesy: Clear Tax]