ELSS or PPF: Which is better?
One is for the very long term while the other comes with its own risks. They have their advantages and disadvantages. Here are the details that will help you choose the right one.
There are many options for you to save taxes under Section 80C of the Income Tax Act. Two of the most popular ones are the Equity Linked Savings Scheme (ELSS) mutual funds and the Public Provident Fund (PPF). Both the investments offer tax benefits of up to Rs. 1.5 lakhs under Sec. 80C. You need to understand both and look at them in relation to your life goals to find out which one will suit your portfolio.
What is ELSS fund?
These are a kind of equity mutual fund that are specifically launched to help you claim tax benefits while generating long term wealth for you. They come with the lowest lock-in among tax saving products. ELSS lock in is just three years. You can start investing for as low as Rs. 500 per month.
What is PPF?
This scheme was primarily launched by the government for helping people save taxes and for accumulating money for the investor’s retirement. The government announces the interest rate for PPF every quarter. For Financial Year 2020-21, October-December quarter, the interest rate is 7.1%. PPF has the longest lock in of 15 years. However, you can get a loan against your PPF investment from the third year.
What are the differences between ELSS and PPF?
The two investments are different on several parameters.
ELSS is risky because it invests in the stock market. Only those investors having a medium to high risk profile should consider investing in ELSS funds. PFF is a government backed scheme and there is hardly any risk of capital loss.
ELSS can provide much higher returns than PFF in the long run. Consider this: best ELSS funds such as SBI Tax Advantage Fund and Quant Tax Plan have provided annualised returns of over 15% in the past five years. The ten-year annualised return of Axis Long Term Equity Fund is close to 14%. When you compare the average return of PPF which is 7%, ELSS seem to be score here. However, the returns from ELSS are not fixed or guaranteed.
Tax on gains
The income you earn from PPF is totally tax free. However, for ELSS, you will need to pay capital gains of 10% if your long-term capital gains exceed Rs. 1 lakh.
You will need to stay invested in PPF for 15 years. ELSS has a shorter lock in of three years. However, you can continue to hold the investment until you redeem.
Maximum investment tenure
You can hold your PFF for 15 years and this can be extended only by 5 more years. You will need to withdraw the money at end of maturity. However, you can hold on to your ELSS investment for any period of time you need.
ELSS is a stock market linked investment and is hence affected by the stock market movements. Even though PFF interest is fixed, the interest rates have been linked too government security rates and are changed every quarter.
You can invest in both PPF and ELSS on a monthly basis or you can make a one-time investment in them. The minimum investment for PFF is Rs. 500 a year and the maximum you can invest is Rs. 1.5 lakhs for a financial year. For ELSS, the minimum investment is Rs. 500 for the Systematic Investment Plan (SIP) and there is no limit to the amount of investment you can make in ELSS.
For PPF, you can withdraw money from the sixth year while for ELSS, you can redeem after three years.
ELSS or PFF: Which to consider?
As a taxpayer and an investor, you should consider your investment goals, your tax saving requirements and your risk profile before choosing one of them. You should make a note of the premature withdrawal option if you are not investing for the very long term. If you may need any funds within five years, PPF will not be a great option. If you want to save taxes while generating wealth, you can consider investing in ELSS funds.