There is always a concern about tax implications, within the retail investor. In fact, many prospective investors shy away because of the large tax rates that one has to pay on the returns of an investment. But what if there is a way out?
What is the best instrument to save tax? There are multiple options – ELSS, PPF, NSC, and tax saving FDs. In this article, we discuss ELSS vs PPFs.
In this article
- What is ELSS?
- What is PPF?
- Advantages Of ELSS
- Advantages of PPF
- Disadvantages of ELSS
- Disadvantages of PPF
What is ELSS?
Equity Linked Savings Scheme (ELSS) is a type of a mutual fund that qualifies for tax benefit under section 80C of IT Act.
ELSS is a popular investment choice for many retail investors, as it provides substantial tax benefit with a 3 year lock-in period.
ELSS is the only tax saving fund where the investor can invest fully in equity and equity-related securities.It is characterized to incur long-term returns. In fact, investing in ELSS beyond 3 years(lock-in period) is considered to be a good investment option. ELSS funds provide the options of dividend as well as growth.
More details on ELSS – https://groww.in/blog/elss/.
What is PPF?
PPF stands for Public Provident Fund – a fixed interest scheme in which the Government decides the interest rates.PPF is considered to be one of the safest investment plans in India, as it is backed by the Government.
PPF was launched in 1968 and it aims to instill the habit of saving amongst Indians. It is basically a saving tool for retirement. This tax benefit under this scheme comes under the EEE (exempt-exempt-exempt status). It is, therefore, the safest medium of investment.
More details: https://groww.in/blog/ppf-faqs/
Update: The present PPF rate is 7.6%.
Advantages Of ELSS
ELSS funds are tax saving funds and an investor can claim a tax deduction of 1,50,000 under Sec 80C. The specialty of this scheme is that investors can save tax, as well as generate good returns.
These funds provide better returns compared to other tax saving investments as they invest in equity and equity-related securities.
The Option of SIP:
Investors can opt for the SIP or Systematic Investment Plan, wherein a particular amount is directly deducted from the investor’s income /savings. Many retail investors find this method conducive, as it also provides adequate tax benefits.
Advantages of PPF
The amount invested in a PPF is completely exempt from tax, because of the EEE Scheme (exempt-exempt-exempt). This is the only scheme wherein the returns are completely tax free.
PPF has a lock-in period of 15 years, but if the investor wishes, he/she can withdraw upto 50% of the money after five years, from the previous year’s balance.
Many times investors do not wish to withdraw money, in this they can avail for a loan. This loan is payable within three years and the rate of interest is always 2% higher than the present PPF rate.
Tenure Can Be Extended
Another important advantage of PPF is that the investor can wish to close the account after fifteen years (end of lock-in period).
However, if the investor wishes to extend the tenure, he/she can do so for the next five years, once the tenure of fifteen years is matured
Disadvantages of ELSS
Limited Tax Benefits
The maximum tax limit for ELSS funds, Section 80C is 1,50,000, including all other benefits like life insurance, repayment of home loan and PPF. Now, if all these deductions add up to 1,50,000 or more, there will no tax deduction on this scheme.
Unlike PPF, in the ELSS scheme, the investor cannot withdraw money before the lock-in period. Hence, it might not be a good option during emergencies.
Disadvantages of PPF
Long Liquidity Period
A PPF account has a lock-in period of 15 years. Hence, if an investor has the concern of liquidity, then PPF is a bad idea for them.
The maximum amount of money an investor can invest in a PPF each year is 1,50,000. Now suppose, you have received a hefty sum of money, which you want to invest in a PPF account, you will not be able to because of the specified limit.
Hence, PPF is not recommended for large amounts
ELSS v. s PPF
Following table captures the primary difference between ELSS and PPF
|Criteria||Tax Saving MFs||PPF|
|Lock-in||3 years||15 years|
|Tax on Returns||No||No|
|Expected Returns||15% (market linked)||8.10%|
From the tax perspective, both have tax exemption under Section 80C of the Income Tax Act up to certain limit. The difference is mainly in risk, returns, and liquidity.
How does ELSS returns compare with PPF?
While PPF provides relatively predictable returns at the risk of lower inflation-adjusted returns, ELSS returns depend completely on underlying stock prices.
Let’s take a sample portfolio of the following 4 ELSS funds:
This is how returns compare between ELSS and PPF
|Duration||Tax Saving MFs||PPF|
If you had started investing Rs 10,000/month around 5 years back, this is how your investment would have grown so far.
ELSS Tax Saving Portfolio: 9,58,700
Here is the link to ELSS Tax saving portfolio – Best Tax Saving Portfolio for 2017
The return difference between ELSS and PPF might look very tempting in the favor of ELSS. However, there is one big factor you need to consider: Risk. PPF comes at a very low risk – there are almost no chances that you will lose your money or make less than returns specified.
ELSS, on the other hand, have risks associated with stocks that these mutual funds invest in. In short term, there is no guarantee of returns or even protecting the capital (and that is true for the long term as well but risk tends to reduce as the duration increase).
From the liquidity perspective, ELSS is locked in for 3 years while PPF has a lock-in period of 15 years. So aligning both the options with right goals become important. For example, if you are planning to utilize your investments in 5 years, PPF becomes a bad choice. However, for goals like retirement, the higher lock-in of PPF should not matter.