ELSS vs. PPF: Which Tax-Saving Option is Better for You?

As the financial year comes to an end, everyone is on the lookout for exploring options to minimise their tax obligations. The two popular options that are explored for tax saving in India are the Public Provident Fund (PPF) and the Equity Linked Savings Scheme (ELSS). Both options have multiple advantages; however, choosing one based on your financial requirements is advisable. 

Through this blog, we will look at the main benefits and features of ELSS mutual funds and PPF investment so that you can select the one that best suits your financial needs. 

Understanding ELSS Mutual Funds
 

As a part of section 80C of the Income Tax Act, ELSS is a type of equity-linked mutual fund that provides tax benefits. These funds are considered to be an excellent choice for long-term gains. They are typically offered with a lock-in period of three years, before which an investor cannot withdraw the funds. This lock-in period guarantees that investors manage to stick around for a longer time to experience market growth. However, it is important to choose the best ELSS funds for investing. 

Why Invest in ELSS Mutual Funds?
 

• Tax Benefits

  Individuals can avail of tax benefits under section 80C of the Income Tax Act. This acts as the primary benefit of ELSS mutual funds. Investors can further minimise their taxable income by up to ₹ 1.5 lakh with these investment avenues.
   

• Better Prospective Returns

  Since ELSS funds are heavily invested in stocks, they outperform traditional fixed-income assets from a long-term perspective. Hence the opportunity to get better returns.
   

• Less Lock-in Time

  In comparison to investment options like PPF, ELSS funds have a shorter lock-in period of 3 years. This helps in availing some degree of liquidity for the investor.

Understanding Public Provident Fund (PPF)
 

Another popular investment option that provides great returns and tax benefits is PPF. This works under the support of the Indian government. Investors can invest a set amount of money. However, the lock-in period for this investment is 15 years. 

Why invest in PPF?
 

• Reliability and Protection

  Given that the PPF scheme is a government-backed investment option, it is considered to be one of the safest. There is an assurance when it comes to the amount invested and the interest generated. 

 

• Tax-Free Returns

  Unlike other investment options, the interest you earn on PPF investments is tax-free. This saves the investor considerable money in taxes over the long term. 

 

• Long-Term saves

  From a long-term savings and methodical investing perspective, the 15-year lock-in period for PPF turns out to be a good way to encourage savings. 

ELSS vs PPF: Understanding the Major Differences
 

 

1. Nature of Investment
    

   • ELSS

     When investing in the best ELSS funds, a person is primarily investing in equities and securities that lead to better and increased returns. It comes with its own set of risks but also comprises a pathway to better profits. 

   • PPF

     PPF is a debt scheme under the government's control and devised for long-term savings. It is considered to be a safer and more secure alternative since the investment is in fixed-income securities. 
      

2. Investment Limit
    

   • ELSS

     ELSS funds do not have an upper limit for investment. However, only ₹ 1.5 lakh can be saved under section 80C for taxes. 

   • PPF

     You can invest a maximum of ₹ 1.5 lakhs annually in a PPF account. Also, it must have an initial deposit of ₹ 500. It is important to keep in mind the PPF investment limit while considering your taxes. 
      

3. Lock-in Period
    

   • ELSS

     ELSS funds have a three-year lock-in period. After the end of this period, investors can withdraw the invested amount. 

   • PPF

     The PPF lock-in period is for 15 years. However, you have the option of partial withdrawal after seven years. 
      

4. Returns
    

   • ELSS

     Since ELSS funds are market-linked, their performance varies based on the stocks. This affects the long-term returns you can expect. 

   • PPF

     PPFs provide a fixed return rate. These are predetermined by the government. Hence, you can easily gauge the returns that you can expect.
      

5. Risk Profile
    

   • ELSS

     ELSS funds are prone to market risks.  The investment value also changes with stock price variations. 

   • PPF

     PPF is a low-risk investment option. This is because of the support it has from the government to provide fixed and better returns. 
      

6. Withdrawals and Partial Redemptions
    

   • ELSS

     Investors are unable to withdraw the amount before the end of a three-year lock-in period. After the period is over, you can withdraw a portion or the entire amount of your investment. 

   • PPF

     Under PPF, you can withdraw a partial amount after seven years. After maturity, you can renew the account with or without additional investments.
      

7. Market-Linked vs Fixed Returns
    

   • ELSS

     ELSS funds are directly linked to market performance. So, the return of money is always subject to risks. 

    

   • PPF

     PPFs offer fixed returns based on the interest rate decided. Hence, this investment option offers a balanced and steady return option. 

Conclusion

In conclusion, ELSS mutual funds and PPF investments are great tax-saving options. Another savings option could be through life insurance. Invest wisely and in sync with your financial goals.