ELSS vs PPF

Individuals looking for long-term savings or investments should consider opting for schemes that not only generate high returns but also allow them to avail of tax benefits. For that purpose, both the private and public financial sector offers several plans that investors can choose from.

Equity Linked Savings Scheme (ELSS) and Public Provident Fund (PPF) are two such schemes that generate high returns and also offer income tax benefits. Both these plans are ideal for those looking to maximise their savings through wealth appreciation and create a disciplined savings habit. 

The following are points in light of ELSS vs PPF, which can aid individuals to choose the right product or opt for both.

Equity Linked Savings Scheme (ELSS)

ELSS is classified as a mutual fund that offers income tax benefits. As the name suggests, these mutual funds invest in equities. As these are market-linked, returns from this fund are subject to their performance. 

During PPF vs ELSS returns comparison, the latter can generate more returns in the long run if market conditions are favourable.  

ELSS can be of two types – 

• Close-ended – Where the number of units available for purchase is fixed. These are issued during a new fund offer (NFO) and are available until all the units are sold. Close-ended mutual funds are generally bought and sold via brokers.

Example – ICICI Prudential Long Term Wealth Enhancement Fund.

• Open-ended – Where the number of units is not limited. Open-ended mutual funds are bought and sold directly from an AMC or fund house.

Example – Axis Long Term Equity Fund.

Individuals can invest in this fund either through a lump sum corpus or via systematic investment plan (SIP). Unlike the former, SIPs allow a person to invest a fixed amount of money every month for a certain period, like recurring deposits.

Some of the features of this scheme are as follows – 

• Income tax benefits 

ELSS offers income tax benefits under Section 80C, wherein contributions of up to Rs.1.5 lakh are free from taxation each year.

The maximum amount that an investor can save on taxes via these schemes is Rs.46,800, calculated as per the highest income tax slab. 

Also, even though this fund allows investors to save tax, it is subject to long-term capital gains tax at 10% when returns are Rs.1 Lakh or higher. 

• Short investment period 

Equity Linked Savings Schemes have a minimum lock-in period of 3 years. When knowing about ELSS vs PPF, the former can offer more liquidity than the latter.

It should be noted here that investors are not locking their money for 3 years but buying the units for the same period. Hence, this fund does not offer any premature withdrawal facility.

• Minimum investment amount 

The minimum amount that one can invest in an ELSS scheme is Rs.500. While there is no ceiling for investment, income tax benefits will only be available for up to a maximum investment of Rs.1.5 Lakh in a year.

The expected returns from this investment can be illustrated below –

Mr Gupta plans on investing Rs.500 in an ELSS via SIP for 7 years. The average expected returns from it is around 12%.

After 7 years, he will receive Rs.64,401 by investing a total of Rs.42,000 and earning capital gains of Rs.22,401, as per the expected rate of return.    

Those asking “is ELSS better than PPF” have to consider that while the former is market-linked, the latter offers guaranteed returns.   

Public Provident Fund (PPF)

Public Provident Fund or PPF is a Government of India-backed investment scheme for the long-term. PPF accounts can be created via post offices or any commercial bank. This scheme also allows income tax benefits along with favourable returns.

The interest rate of this investment option is determined every quarter by the Government of India. As of 2024, the rate has been set at 7.1%. 

When considering investing in PPF or ELSS, it should be noted that the former is not available for Hindu Undivided Families (HUFs) and NRIs.

Some of the features of Public Provident Fund are as follows –

• Income tax benefits 

Individuals investing in this option can avail tax benefits of up to Rs.1.5 Lakh every year under Section 80C of the Income Tax Act, 1961.

• Long-term investment period 

Public Provident Fund accounts have a lock-in period of 15 years. One of the essential points in ELSS vs PPF, the prolonged investment period of the latter makes it an ideal scheme for creating a retirement portfolio.

• Premature withdrawal facility 

 Investors can withdraw their investment prematurely from the 5th year onwards. The amount one can withdraw is capped at whichever is lower of the following – 

• 50% at the end of the 4th year.

• 50% at the end of the year that precedes that of withdrawal.

For example,

Mr A created a PPF account in 2010. Standing in 2020, he wants to withdraw 50% of the available funds for a medical emergency. 

Now, let’s assume that – 

• Amount at the end of 4th year or 2014 is Rs.2 lakh. 

50% of the same is Rs.1 lakh.

• Amount at the end of 2019 is Rs.5 lakh. 

50% of the same is Rs.2.5 lakh.

Hence, Mr A will be able to withdraw Rs.1 lakh from his PPF in 2020 as it is the lowest of the two. 

• Minimum investment required 

Account holders have to make a minimum deposit of Rs.500 in a year. The maximum amount that they can deposit is Rs.1.5 lakh for each year.

Difference between ELSS and PPF – 

Eligibility

1. For ELSS

• Salaried professionals seeking a secure and dependable investment solution.
• If you are looking for a low-risk investment choice.
• If you want to diversify your portfolio while saving money on taxes.
• ELSS mutual funds can be invested in by people of any age.

2. For PPF

• PPF accounts are only available to Indian citizens.
• An Indian citizen residing in another country may continue to operate his or her PPF account.
• Parents/guardians can open a PPF account on behalf of their minor children.

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