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PPF vs. ELSS: which is a better tax-saving option?


The Indian Income Tax Act provides many options for people to minimise their tax liability each year. You can invest in different avenues and save tax every year. Two popular investment options are Public Provident Fund (PPF) and Equity Linked Saving Scheme (ELSS). In this piece, let’s find out which is a better option for investors.

First, let’s first discuss the features the common features present in both investment avenues. Both PPF and ELSS are tax-saving investment options. PPF is a savings option offered to investors through banks and post offices. ELSS is a type of mutual fund investment that invests a significant portion in equities. By investing in these avenues, you can claim a tax deduction every year on investments up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961. And while the period may vary, both avenues come with a lock-in period.

Here is a list of different parameters comparing the two investment avenues:

Security

PPF is considered a safe investment avenue because the Indian government backs it. This signifies a minimal risk of default or loss. In comparison, ELSS funds invest a considerable portion of the money in equities. The returns you earn on your investments are linked to the stock market. As a result, there could be a greater degree of risk exposure compared to PPF. However, you can minimise your risk by investing in ELSS funds for the long term.

Investment amount

You can create a PPF account with a minimum subscription amount of Rs. 100. Following that, you can invest a minimum amount of Rs. 500 in the account every year. The maximum amount allowed is Rs. 1.5 lakh. The minimum amount for ELSS is Rs. 500 for a one-time lump sum amount and Rs. 500 per month in case you wish to start a Systematic Investment Plan (SIP).On the contrary, you can invest any amount in ELSS funds.

Lock-in period

Both PPF and ELSS funds have a lock-in period before which you cannot withdraw your funds. PPF comes with a 15-yearlock-in period. And once the mandatory lock-in period is over, you can continue investing in PPF in batches of five years. ELSS funds have a lock-in period of just three years. This is the lowest lock-in period for any tax-saving investment scheme under Section 80C. This feature gives you the freedom to utilise your money in case your investment plans change.

Best time to invest

You can maximise your annual returns in PPF by investing at the beginning of the year. This gives your fund the opportunity to earn interest over the entire year. But in the case of ELSS funds, it is a good idea to take the Systematic Investment Plan (SIP) approach if you earn a regular salary. This reduces your risk and helps you increase your earnings over time.

Interest rate

The interest rate you earn on your PPF is benchmarked to yields on government securities.  It is revised every quarter by the government. As of now, the interest rate on PPF investments is 8.0%. The returns on ELSS funds are linked to performance in the equity markets. However, investors can hope to earn between 10-15% per annum based on the fund performance.

Partial withdrawal

When you invest in a PPF, you have the option of making partial withdrawals from your fund from the seventh year. This allows you to take care of any expenses down the line such as funding your child’s education or marriage. In the case of ELSS funds, you can make a partial or complete withdrawal from your fund after a period of three years, but not before that.

Premature closure

It is always good to invest until the lock-in period is completed. But sometimes, it may not be possible, and you may want to close your investment prematurely. PPF allows a premature closure of the fund only in special circumstances like meeting expenses for medical treatment. But in the case of ELSS funds, it is mandatory to complete the three-year lock-in period. And while you have the option to stop an ongoing SIP in the ELSS fund, you cannot redeem the investment amount until the three yearsis completed.

Taxation

PPF investments fall under the EEE (Exempt, Exempt, Exempt) tax category. This means that contributions made towards PPF are exempt from tax under Section 80C; interest earned is exempt from income tax and the total income earned at maturity is also exempt from tax. ELSS funds, on the other hand, are eligible for Long Term Capital Gains (LTCG) tax of 10% for capital gains that exceed Rs. 1 lakh in a financial year.

Conclusion

This brings us to a pertinent question - Which is a better option? Both PPF and ELSS are excellent investment options to save tax. If you are a conservative investor looking for stable returns to fund long-term financial goals such as creating a retirement corpus or funding your child’s education, you may want to go for PPF. But if you are ready to take on a degree of risk, ELSS funds can help you earn high returns over the long term. The low lock-in period and the option to invest each month in the fund through SIP make investing in ELSS an excellent choice.

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