ELSS vs PPF

Individuals looking for long-term savings or investments should consider opting for schemes that generate high returns and 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.

What is an 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.  

Different Types of ELSS

ELSS can be of two types – 

1. 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.

1. 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 a 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.

Features of Equity Linked Savings Scheme (ELSS)

Some of the important features of ELSS 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 an investor can save on taxes via these schemes is Rs.46,800, calculated 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 to invest Rs.500 in an ELSS via SIP for 7 years. The average expected return 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?” it is important to note that while ELSS is market-linked and offers higher return potential, PPF provides guaranteed returns with less risk.   

What is 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.

Features of PPF

Some of the features of the 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 is the prolonged investment period, which makes it an ideal scheme for creating a retirement portfolio.
• 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.
• 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 or 50% at the end of the year that precedes that of withdrawal.

For example,

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

Now, let’s assume that – 

The amount at the end of 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. 

Difference between ELSS and PPF 

The table below shows the comparison of ELSS and PPF:

Who Can Invest in ELSS?

ELSS is an investment option if you are a

• Salaried professional seeking a secure and dependable investment solution
• Looking for a low-risk investment choice
• Want to diversify your portfolio while saving money on taxes

Who Can Invest in PPF?

You can invest in PPF if you are:

•  An Indian citizen living in India or abroad.
• A Parent/guardian   wanting to start a PPF account on behalf of their minor children.

PPF Vs ELSS: Tax Implications

If tax savings are your ultimate goal when investing in PPF or ELSS, then understand that PPF is more tax-friendly. Under Section 80C, maturity proceeds from the PPF scheme are completely tax-free. 

ELSS is also tax-friendly as you get up to Rs 1 lakh tax-free capital gains. When your capital gains are more than Rs 1 lakh, they are taxed at 10%. Many investors choose tax harvesting to benefit from the exemption. You can harvest tax-exempt capital gains of up to Rs 1 lakh every financial year once the lock-in period is exhausted and reinvest this in ELSS again to enjoy further tax savings.

PPF Vs ELSS: Liquidity

Both ELSS and PPF schemes lock in your investment, though not indefinitely. When your investment is locked in, the liquidity is limited.

The minimum lock-in period for PPF is 15 years, which can be extended to blocks of 5 years. After 7 years of investing in PPF, withdrawals are allowed up to 50% of the 4th year balance. You can also avail of loans based on PPF.

ELSS mutual funds are more liquid as you can partially or fully redeem ELSS fund units after the 3-year lock-in period. However, it is not mandatory to redeem the units after the lock-in period. You can continue investing in ELSS or other schemes based on your financial goals and investment strategy.   

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