Comparison between PPF and ELSS, which is better?


Both Public Provident Fund (PPF) and Equity Linked Savings Scheme (ELSS) are saving schemes that are eligible for tax benefits. Hence investors are often confused on which one to choose among these two.

Are they similar?

No doubt PPF has been popular among the investors for so long. However, these days, ELSS seems to be picking up fast due to the higher returns it promises. In fact, it is important to know that there is nothing similar between these two investment vehicles beyond the tax benefits they carry. When you know the

About PPF

Public Provident Fund (PPF) is a savings scheme created by the government that assures guaranteed returns and some attractive tax benefits under Section 80C. The government revises the interest rates of this scheme during every quarter. For example, the interest rate for the current quarter Q 2 (July-September), FY-19 is fixed at 7.9%.

About ELSS

Equity Linked Saving Scheme (ELSS) can be described as a type of mutual fund that carries tax benefits under the section of 80C of the Income Tax Act, 1961. Currently, it has become immensely popular due to its high returns and the lowest lock-in period.

PPF Features

Low-Risk

Since PPF is a government-backed savings scheme, it is considered as a safe investment option available in India. Since the capital and returns are safe, it is one of the most popular investment options.

Tax Benefits

Since the investments in PPF fall under the exempt-exempt-exempt (EEE) category, the PPF deposits are never taxed at any point. The investment up to a limit of 1.5 lakhs per annum, the monthly interest and the maturity amount is completely tax exempt.

Lock-in Period

Deposits in PPF are characterized by a mandatory lock-in period of 15 years. Nevertheless, it is possible to take a loan on PPF deposits starting from the 3rd to 6th financial year from the date of opening the account. From the 6th year, partial withdrawal is possible.

Fixed Returns

In an average, the investments in PPF have invited 8% interest over the past. Also since the government decides the interest rate during every quarter, PPF assures fixed returns.

Investment and Withdrawal

The minimum and maximum investment you can make in a PPF investment account is Rs 500 and Rs 1.5 lakhs respectively. In case of serious ailments, premature closure is allowed. Partial withdrawals are permitted from the 6th year.

ELSS Features

High Returns

Studying the history, we find that ELSS has always assured one of the highest returns among the tax-saving instruments. In the past, it has generated about 11-14% returns in a time frame of 3-years and 5-years. However, since the returns under ELSS are market-linked, they are not market guaranteed.

Tax Benefits

Section 80C allows tax benefits on ELSS investments up to Rs. 1.5 lakhs per year. However, while PPF is tax-free during all stages, the gains from ELSS scheme is taxable if it exceeds Rs. 1 lakh in a given year.

Lock-in period

Among the different tax-saving investment options, ELSS comes with the lowest lock-in period of only 3 years. Hence it carries a high degree of liquidity.

SIP Option

An investor can start investing in ELSS with an amount as low as Rs. 500 per month through Systematic Investment Plan. Whenever convenient, you can either start or stop the SIP.

How to choose between PPF and ELSS

PPF suits investors who do not want to take risks and can afford the lock in period of 15 years. Those investors who want to take only moderate risk and want to earn a higher interest can go for ELSS.
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