ELSS vs PPF

ELSS vs PPF: A Comparative Analysis for Investors

ELSS (Equity Linked Savings Scheme) and PPF (Public Provident Fund) are both tax-saving investment options.

ELSS: Equity Linked Saving Scheme (ELSS) is a type of mutual fund that qualifies for tax deductions under Section 80C of the Income Tax Act, 1961. Known for its relatively short lock-in period of 3 years and higher returns, ELSS primarily invests in equities. This makes it suitable for individuals with long-term financial goals.

PPF: Public Provident Fund (PPF) is a government-backed savings scheme offering guaranteed returns and tax benefits under Section 80C. The interest rates on PPF are set by the government every quarter, and the current rate for the third quarter of FY-19 is 7.9%.

ELSS Features:

• • High Returns: ELSS funds have historically generated returns of around 11-14% over 3 to 5 years. However, these returns are market-linked and not guaranteed.

  • Tax Benefits: Investments up to Rs. 1,50,000 annually in ELSS qualify for tax deductions under Section 80C. Unlike PPF, ELSS returns are taxable at 10% if gains exceed Rs. 1,00,000 in a year.

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  • Lowest Lock-in: ELSS has a short lock-in period of only 3 years, providing more liquidity. Investors can redeem ELSS investments after 3 years.

  • SIP Option: ELSS allows for monthly investments with a minimum amount of Rs. 500 through Systematic Investment Plans (SIP).

PPF Features:

• • Low-Risk: PPF is one of the safest investment options due to government backing.

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  • Lock-in Period: PPF comes with a mandatory 15-year lock-in period, with limited options for withdrawal during the 3rd to 6th financial year.

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  • Tax Benefits: PPF investments are tax-exempt at every stage (exempt-exempt-exempt or EEE category). Both deposits and interest are tax-free.

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  • Fixed Returns: PPF offers fixed returns, with an average interest rate of around 8% in the last 5 years.

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  • Investment and Withdrawal: PPF allows minimum investments of Rs. 500 and a maximum of Rs. 1,50,000 annually. Partial withdrawals are permitted after 5 years.

Differences between PPF and ELSS:

• • Risk: PPF is low risk, making it suitable for risk-averse investors. ELSS is exposed to market risks and offers potentially higher returns for those willing to take on risk.

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  • Returns: PPF offers fixed returns, while ELSS returns depend on market performance.

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  • Tax on Returns: PPF returns are entirely tax-free, whereas ELSS returns are taxed at 10% for gains over Rs. 1,00,000.

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  • Lock-in Period: PPF has a 15-year lock-in, while ELSS has a 3-year lock-in.

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  • Time Horizon: PPF has a fixed 15-year investment period, while ELSS has no specific time limit.

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  • Volatility: PPF is unaffected by market volatility, while ELSS is linked to equity markets.

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  • Offered Through: PPF is available through banks and the post office, while ELSS is offered by mutual fund houses.

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  • Contribution: Both options allow monthly or lump-sum investments.

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  • Partial Withdrawal: PPF permits partial withdrawals after 5 years, whereas ELSS has no such provision until the 3-year lock-in period expires.

Debalina Roy Chowdhury Dilzer Consultants

Sources:

• Scripbox - ELSS vs. PPF
• Paisabazaar - ELSS vs. PPF
• ClearTax - ELSS vs. PPF