ELSS VS PPF? WHERE TO INVEST FOR TAX SAVING?
There are many investment products available in the market such as equity, debt, money market instruments, mutual funds, ELSS, PPF etc. Every investment product or scheme has its own features combined with different risk/return characteristics. Investments with high returns also carry high risks.
In today’s article we will talk about what are considered 2 of the best and most popular tax saving options available to investors i.e ELSS & PPF. In both of them, an individual can claim deductions under section 80C of the Indian Income Tax Act.
Section 80C: Section 80C as per the Income Tax Act, 1961 allows tax deductions up to an amount of Rs.1.5 lacs in a financial year. These deductions are allowed by the government to encourage individuals and households to park their savings in investments that will help them to meet their financial goals.
EQUITY LINKED SAVING SCHEMES (ELSS)
ELSS also known as Tax Saving Funds are the only mutual fund schemes which provide the benefit of tax deduction under section 80c. ELSS funds invest primarily in equity and equity related securities. Due to their high exposure in equities, the risks involved in ELSS are also high. ELSS schemes are provided by several asset management companies and are managed by professional fund managers.
PUBLIC PROVIDENT FUND (PPF)
PPF is a popular long term investment instrument provided by the Government of India. It comes with guarantee from the central government on the interest & corpus. They have been considered as the safest financial product with decent returns. PPF invests mostly in fixed income securities which have a low risk component.
You can take the help of the below listed points to understand the difference between PPF & ELSS and accordingly make a decision on where to invest.
- RISK FACTOR
PPF is completely backed by the Government of India, and the investments are made in fixed income securities. So the risk involved in PPF is almost negligible. Also, the interest rate is decided every quarter and there is no daily volatility.
ELSS is provided by the AMCs, they do not guarantee the returns as their investments are in equity securities. They are risky compared to PPF and are suitable for long term investments.
The return on PPF is announced by the central government every quarter. Currently (first quarter of 2020-21) the interest rate is 7.10%.
The best performing ELSS mutual funds can provide 12-15% returns annually over a period of 5 years or more.
- INVESTMENT HORIZON & LOCK-IN PERIOD
In PPF, there is a lock-in period of 15 years and after which a 5 year extension can be made by the investor.
Also Read: Top Large Cap Equity Funds 2020
ELSS carries a lock-in period of 3 years and an investor can stay invested in the fund as long as he wishes to.
An investor can only withdraw partially i.e 50% of the amount subject to certain conditions like health emergencies, child education etc. after the completion of 5 financial years in PPF.
However, in the case of ELSS one cannot withdraw any amount before the lock-in period of 3 years.
So an investor should analyse this before entering into investment as how prepared he is to meet emergency requirements.
- TAX ADVANTAGE
PPF comes under the category of EEE(EXEMPT-EXEMPT-EXEMPT) as the amount at the time of investment, the interest earned, as well as the amount at the time of withdrawal all are completely exempted from tax.
On the other hand in ELSS, an investor can claim tax deductions to an extent of Rs.1.5 Lacs under section 80C. However, Long Term Capital Gains of value more than 1 lacs in a year are taxed at the rate of 10%.
- INVESTMENT LIMITS
In both PPF & ELSS, one can make investments either through a lump-sum or monthly instalments.
In PPF, one can start with an amount of minimum Rs. 500 and is allowed maximum to invest 1.5 lacs annually.
ELSSs have no limit on maximum investment in a financial year, but have a minimum amount of Rs.500 to enter into a fund. An investor can invest as much as he wants but can claim deductions up to 1.5 Lacs as per section 80C.
Both ELSS & PPF are excellent tax saving instruments. They have very different features in terms of risk, return, investment limits & others. An investor should make the decision on investing in them very wisely and as per his risk appetite & tolerance. One who is risk averse and just wants stable returns can go for PPF for his tax saving investment otherwise he can go for ELSS which provides high return over a period of time. A careful attention needs to be given on the withdrawal part where one can withdraw early from ELSS as compared to PPF.
So which is the better option completely depends upon the investor’s risk profile & his financial goals.