ELSS vs PPF: WHERE TO INVEST YOUR MONEY?
When you invest, taxes form an integral part of your financial planning. Section 80C of the Income Tax act allows you to claim deductions from your taxable income by investing in tax saving instruments. Two of the most popular tax-saving investments are Equity Linked Saving Scheme (ELSS) and the Public Provident Fund (PPF). These investments are eligible for a deduction under Section 80C of the Income Tax Act up to Rs. 1,50,000.
ELSS is diversified equity mutual fund scheme which invests in equity and equity-related products. ELSS provides you benefits of market linked returns along with tax benefits.
This is a long-term saving scheme, the purpose being to mobilize small saving of individual by offering investments that carry reasonable return along with income tax benefits. PPF fully guaranteed by the government of India. It comes under EEE tax regime, i.e. contribution, interest and maturity amount all are tax free.
Features of ELSS vs PPF:
ELSS vs PPF : Why ELSS is better than PPF
First of all let us discuss why we are comparing these two instruments despite both belonging to different risk category. ELSS is market linked and hence very volatile, while PPF provide fixed returns and has Government of India guarantee associated with it.
The reason for this comparison is that both are tax saving instruments which have EEE tax regime and are long term investments. PPF is a long term investment by design as it has a lock in of 15 years. ELSS being an equity mutual fund is suitable for long term because equities tend to provide good returns in long term and are highly volatile in short term.
Now, let us look into the reasons why ELSS scores over PPF
Short Lock in period
It has lock in period of only 3 years, hence is more flexible and liquid than PPF which has 15 years lock in and partial withdrawals are allowed only after 6 years.
No Restrictions on Investments
In PPF it is mandatory to invest at least Rs 500 per year and you cannot invest more than 1.5 lakhs. However, there are no such restrictions in ELSS, one can skip investing in ELSS in particular year or can invest more than 1.5 lakhs too. However, under 80 C upper limit is 1.5 lakhs under all eligible investments.
The Equity Advantage
To grow your money and get inflation beating returns in the long term there is no better investment than equity. ELSS being an equity mutual fund is a perfect vehicle for the investor having a long term horizon land looking to save tax.
ELSS has market risk but PPF is subject to inflation risk and the real returns from PPF are very low compared to long term returns of ELSS.
The average returns in last 5 years from ELSS are 18.81%. Even the worst performing ELSS fund has given better returns than PPF over 5 years, 10 years or 15 years. The returns from PPF on the other hand have been going down continuously for past many years and are currently below 8%.
PPF is a long term debt instrument while ELSS is long term equity instrument and since for longer term equities are better than debt investment, ELSS scores over PPF.
New to Mutual Funds? Learn about basics of mutual funds.
This blog is written by Prachi Dosani.