PPF vs ELSS: Which is The Better Tax-Saving Instrument?

Introduction

The most prudent investors have short-term, mid-term, and long-term financial goals. When it comes to long-term financial planning, you may look for investments that maximise your returns. In the short term, you may want to invest in a way that your tax liability reduces. Two investment instruments that can help you hit both these birds with one stone are PPF and ELSS. 

Public Provident Fund (PPF) and Equity-Linked Savings Schemes (ELSS) are tax-saving instruments that can help you generate wealth in the long run. You can invest in these instruments to claim a deduction of up to Rs 1,50,000 in a year, per Section 80C of the Income Tax Act. At the same time, the returns these investments generate can help you meet long-term goals like retirement, saving for a house, children’s education, or wealth creation. 

However, the question arises—which is better, ELSS or PPF? Let’s explore the idea by understanding PPF vs ELSS better. 

What is PPF? 

PPF, or Public Provident Fund, is a voluntary retirement scheme backed by the government of India. It was introduced in 1968 to encourage individuals to make small contributions towards their retirement. It doubles as a tax-saver, offering investors deductions of up to Rs 1,50,000. 

Traditionally, PPF returns have been higher than fixed deposits; therefore, they provide inflation-beating returns. They are also considered relatively risk-free instruments because they are backed by the government.

Features

• Guaranteed by the Central Government

PPF is a retirement investment scheme guaranteed by the government of India. This makes it a relatively low-risk instrument. 

• Inflation-Beating Returns

Every quarter, the government of India announces the returns it will be providing on PPF that year. It depends on inflation rates and the market condition. It has been announced that the return on PPF for the first quarter of 2023 (Jan – March) will be 7.1%. 

• Long Lock-In Period 

PPF has a lock-in period of 15 years. This means that once invested, you cannot withdraw the amount for 15 years. However, you have the option to make a premature withdrawal after five years, subject to certain conditions. 

• Only One Account 

Any Indian resident can open a PPF account. Hindu Undivided Families and Non-Resident Indians cannot open a PPF account. Also, every individual can have only one PPF account. 

• Minimum and Maximum Investment 

You need to invest a minimum of Rs 500 every year in a PPF account. The maximum investment amount is capped at Rs 1,50,000 per year. 

• Taxation 

PPF is an exempt-exempt-exempt tax instrument, meaning you get tax exemption at investment, interest generation, and withdrawal or maturity. 

What is ELSS? 

ELSS or Equity-Linked Savings Scheme, is a form of mutual fund that has additional tax benefits. ELSS investments are eligible for tax deductions up to Rs 1,50,000 per year. These open-ended mutual funds must invest at least 85% of their corpus in equity instruments. Returns are market-linked. 

You can invest in ELSS through a lump sum or a SIP, just like other mutual funds. However, you have to remain invested for at least three years to enjoy the tax benefits. While ELSS is considered a high-risk investment, the possibility of returns is also higher because they invest predominantly in equities. 

Features 

• Diversification 

A majority of ELSS funds, i.e., at least 85%, are invested in equity instruments. The remaining are invested in debt instruments, money market securities, gold, etc. This makes ELSS a diversified investment instrument. 

• Inflation-Beating Returns 

In the long run, ELSS funds provide inflation-beating returns, making them good long-term investments. However, since returns are market-linked, they are not guaranteed. 

• Lock-In Period

ELSS has a lock-in period of three years, the lowest among all 80C investments. However, it is not compulsory to liquidate your investments after three years. You can stay invested to reap returns. 

• Flexibility of Investment 

You can invest in ELSS through a lump sum investment or a SIP, depending on your convenience. 

• Taxation 

Dividends from ELSS will be added to your income and taxed based on your tax slab. If you sell your ELSS investments, they will be taxed as equities. This means a long-term capital gains tax of 10% will be applicable for profits over Rs 1,00,000 in a year. 

Understanding PPF vs ELSS

To understand whether you should invest in PPF or ELSS, it is essential to know the difference between PPF and ELSS. Here’s a comparison: 

Which is Better, ELSS or PPF? 

Looking at the returns, you may wonder if ELSS is better than PPF as an investment. What you need to look at while comparing ELSS mutual funds vs PPF is your own financial goals and risk appetite. 

If you are a high-risk investor who wants to make high returns, ELSS could be a good option. It also has a short lock-in period. However, if your risk appetite is low and you want stable returns, PPF may be a better choice. 

You could also choose to diversify your investment in both and get the best of both worlds. 

Final Word 

When comparing PPF vs ELSS as tax-saving instruments, there are many parameters that set the two investments apart. However, choosing between the two comes down to your own financial goals, investment horizon, and risk appetite. 

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