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

There are many tax-saving instruments available under section 80C of the Income Tax Act. In this post, we compare two popular tax-saving instruments; ELSS and PPF that can help you choose the best one for you.

Saving tax is an essential component of financial success. Based on individual circumstances, some tax-saving options may be more beneficial than others. Most investors choose to invest in tax-saving instruments to get tax benefits. While there are many tax-saving investment options, there are two that are widely popular. These are ELSS and PPF.

While both options help you save tax under section 80C of the Income Tax Act, they differ in many ways. Let's understand the differences.

It is an equity-oriented scheme where at least 65% of the funds' corpus is invested in equity or equity-oriented investments. While most of these funds invest across market capitalisations, some may focus on specific market capitalisations to give higher return potential to investors. But do note, the higher the return potential, higher will be the risk level as well. However, ELSS funds are popular not only for their return potential but also for the tax benefits it offers.

• Shortest Lock-in Period:

  Every tax-saving instrument under section 80C comes with a lock-in period. The equity-linked saving scheme enjoys the least lock-in period of three years.

• Tax Deduction Under Section 80C:

  You can avail a deduction on your taxable income of up to Rs 1.5 Lakh per year for the investments made in ELSS funds.

• Long-term Capital Gains (LTCG) Tax:

  Being an equity fund, you don't have to pay any LTCG on capital appreciation of up to Rs 1 lakh per year. Above that, you must pay an LTCG tax of 10% on the appreciation.

• Wide Investment Options:

  There are different types of ELSS funds. While some focus primarily on large-cap stocks, others focus on small-cap or mid-cap stocks. And there are some that invest across market capitalisation. Moreover, you have the option to choose two ways to receive the returns - growth option and dividend option.

• High Return Potential:

  While most tax-saving investment instruments offer a fixed rate of return, ELSS schemes have the potential to generate higher returns.

• No Maximum Limit on Investment:

  With ELSS, you can invest as less as Rs 1000 through a SIP (Systematic Investment Plan), there is no higher limit on the amount you can invest. While you can invest more than Rs 1,50,000 in a year, you only get tax deductions of up to Rs 1.5 lakh.

PPF (Public Provident Fund) is a long-term, government-backed savings scheme, and a popular tax-saving instrument. You must deposit a minimum amount every month on which a compounded interest rate is applied, which is announced by the government every financial year. The return rate for the first quarter of the fiscal year 2020-21 has been set at 7.9%. PPF has a maturity period of 15 years and is meant for people working in the unorganised and private sector and for those who are self-employed.

• Minimum and Maximum Deposit:

  You can deposit a minimum of Rs.500 and a maximum of 1.5 lakhs per annum. The deposits must be made no more than 12 times a year. Missing out on the annual minimum will lead to accumulation of arrears and fines.

• Lock-in Period:

  The lock-in period for PPF is 15 years. PPF has one of the longest lock-in periods for tax-saving instruments offered under 80C.

• Assured Returns:

  Being a Government scheme, you get assured returns at fixed rates. This makes it a relatively safe investment option. In the FY14-19 period, the average PPF rate was 8.21%.

• Premature Withdrawal:

  Under ideal circumstances, your deposits are locked for 15 years. However, loan facility is available from the third year, and partial withdrawals are allowed only from the seventh year onwards. These are, however, subject to certain conditions.

While both are tax saving-instruments, there are a few key differences that you must know:

• Return Rates:

  ELSS being an equity-driven fund, has the potential of giving a return rate of up to 14-16%. Qualified fund managers professionally manage ELSS funds, but, on the other hand, PPF has a fixed return rate set by the government in every financial year. The average return rate for PPF has been around 8%.

• Risk:

  While PPF has a lower return, it offers guaranteed returns at the declared rates. ELSS funds, while known to be better performing, are subject to market risks.

• Maturity period:

  The maturity for PPF Scheme is 15 years, whereas, ELSS has a lock-in period of only three years.

• Tax-Deductible:

  While the ELSS gives a one-time tax-deductible of up to 1.5 lakh, a PPF account holder has the potential to avail the same tax-deductible, every year for the duration of the scheme. Also, PPF is exempt from all tax, including at maturity. ELSS is also exempt from taxes at maturity except for Long term capital gains tax is applicable on all earnings above 1 lakh.

For the first-time investors, here is a table to summarise and compare the two options:

To summarise, PPF is for the more risk-averse investor. The returns are steady and guaranteed. However, the maturity period is very long. The return rate is comparatively higher than the interest offered by savings accounts. ELSS schemes are better suited to investors with an appetite for risk. It offers higher return potentials and comes with relatively shorter lock-in periods. ELSS funds are subject to market conditions and hence riskier. Make sure you take stock of your financial goals, responsibilities, assets and liabilities before making a choice.