PPF VS ELSS

ELSS VS PPF

Which is the  better tax saving plan ?

As we know that there are so many options available for tax savings. In this article we will know which is better tax saving plan, Mutual Fund ELSS or PPF. In both the cases we can save tax up to Rs1.5 lakh per annum under Section 80C of Income Tax Act, 1961. ELSS relies on equity ,where you could see some volatility whereas PPF is a debt instrument with negligible volatility. Let's understand in details.

What is PPF Investment ?

Before we know the differences between ELSS and PPF , let us know what is Public Provident Fund ? As we know that it is a government scheme which is suitable for long term financial goals, such as children's education and retirement planning, It has a fixed term of 15 years , you can further extend  for another 5 years. You can say that it has a lock in period of 15 years. After the completion of 5th year you can withdraw money partially from your PPF account. PPF invests in debt securities and it is backed by government , hence it is secure in nature. The current interest rate on PPF account is 7.1%, which is decided by government of India. Interest rate on PPF is reviewed every quarter .

Major benefits of PPF account is that  you can avail  loan against your PPF account.

What are ELSS mutual Funds ?

But ELSS is a mutual fund scheme, you can  save tax up to Rs1.5 lakh in a financial year by investing in ELSS schemes. ELSS mutual fund invests their money in equity and equity related instruments which is risky in nature. There is no fixed rate of return, some volatility could be seen in its Portfolio. Those who are looking for long term wealth creation as well as tax savings, ELSS can be a better option. If you will see the last 5 year average return is appx. 12% or above, In addition it has the lowest lock in period of 3 years. Which makes it a better tax savings option .

Major advantages of ELSS scheme is that you can get a diversified equity portfolio by investing as low as Rs500 per month.

ELSS vs PPF

We will compare ELSS and PPF by using different parameters 

1 - Risk

PPF is a better investment option for high risk averse investors, because it bears very low risk which invests in debt securities backed by government of India. On the flipside ELSS  schemes invest in equity and equity related instruments, exposed to the market risks hence volatile in nature. But those who are willing to take risks can reap the benefit of high return in long run.

2 - Return

The interest rate on PPF is decided by government of India, which changes every quarter. Current interest rate in PPF is 7.1%. But ELSS schemes don't have any fixed rate of return like PPF, return depends upon the market movements. The 3 years annualized  historical return is seen 12% or above.

3 - Lock in Period

PPF investment has a longer lock in period of 15 years, with an option to make partial withdrawal after completion of 5 years.

But ELSS scheme carries a lowest lock in period of 3 years which makes it a better tax saving option. But you are not bound to withdraw your money. You can keep your investment for longer duration also.

4 - Time Horizon

You can invest in PPF account for a period of 15 years, which can also be extended for another 5 years. But in ELSS there is no time horizon and you can continue with the investment as long as you wish.

5 - Premature withdrawal facility

PPF gives you the benefit of  partial withdrawal after the completion of  5 years of investment. But in case of ELSS there is no such provision of partial withdrawal before the completion of 3 years of lock in period.

6 - Tax on return

PPF investment carry a tax benefit of  the returns being totally tax free. whereas in case of ELSS  gains of over one lakh are considered long term capital gains and are taxed at the rate of 10%

7 - Contribution

In both the cases you can contribute on monthly basis or in lumpsum . In PPF the minimum investment amount is Rs500 on the other hand the maximum is Rs.1.5 lakhs for every financial year.

In ELSS monthly minimum investment through sip is Rs500, there is no upper limit. 

Conclusion

Investors those who are looking for wealth creation in long term can go for ELSS schemes, As investor invests for a long term horizon, risk could be minimized as well as inflation beating return can be earned.

Those who are not willing to take risk can go for PPF investment, where there is no risk involved, It may take a longer period to achieve your financial goal.

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