ELSS vs PPF: Key Differences Between ELSS and PPF

07 Feb 2023|

5 min read |

by ICICI Securities Team

Pros and cons of investing in ELSS vs. PPF

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.

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.

Key Differences Between PPF and 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:

Particulars	PPF (Public Provident Fund)	ELSS (Equity-Linked Savings Scheme)
Who can invest?	Everyone except HUFs and NRIs	Everyone can invest
Risk and return	Low-risk, because it is backed by the government of India; Returns between 7%-8%, as decided by the GoI	High-risk, because it invests in market instruments; returns depend on market performance
Lock-In Period	15 years	3 years
Premature Withdrawal	Allowed after 5 year	No premature withdrawals
Minimum/ maximum investment	Rs 500/ Rs 1,50,000 per year	Rs 500/ no upper limit, although only Rs 1,50,000 is eligible for tax deduction
Taxation	EEE—investment, interest, and maturity amount are tax-free	Gains up to Rs 1,00,000 are tax-free in a year. Above that, LTGC is applicable

Features of PPF

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.

Features of ELSS Mutual Funds

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.

Eligibility for PPF

Indian residents only: NRIs and HUFs are not eligible.
One account per person: You can only have one PPF account in your name.
Minors are also eligible: Parents or guardians can open an account for a minor.
No joint accounts: PPFs cannot be opened jointly.

Eligibility for ELSS

Anybody can invest: There is no specific eligibility based on income or profession to invest in ELSS.
Documents required: Any person having a valid bank account and a PAN shall be eligible to invest.
Age Limit: There is no maximum age limit to invest in ELSS.
Minimum Investment: The minimum amount invested would, generally be Rs. 500, and this has a lock-in period of 3 years.

Which is Better, ELSS or PPF

You should 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.

Pros and cons of investing in ELSS and PPF

ELSS (Equity Linked Savings Scheme)

Pros	Cons
Returns: Higher return potential as it invests in the stock market.	No fixed returns: Market performance is dependent, so returns may vary.
Tax Benefits: Eligible for tax benefits under Section 80C.	Complexity: One needs to have an idea about the stock market.
Lock-in Period: The shortest lock-in period of just 3 years among all tax-saving options.
Wealth Creation: Wealth creation is good for the long term with equity exposure.

PPF (Public Provident Fund)

Pros	Cons
Assured Returns: It gives fixed and assured returns.	Lower Returns: It usually offers lower returns compared to ELSS.
Tax Benefits: Contributions come under Section 80C deduction, while interest earned is tax-free	Long Lock-In Period: The lock-in period is 15 years, and though there is the facility of partial withdrawal after 7 years, it isn't a very liquid investment instrument.
Safety: Since it has the backing of the government, it is very safe.	Inflation Impact: Returns may not always beat inflation.
Long-term: Suitable for long-term financial goals.

How To Invest in ELSS And PPF?

ELSS:

Open an online Invest right account or meet a mutual fund advisor.
Choose a well-performing ELSS fund with a good track record.
Make a lump sum investment or start a Systematic Investment Plan for regular investing.

PPF:

Go to your Bank or Post-office with KYC documents (ID & address proof).
Fill the PPF Account opening form with your initial investment.
You can contribute online or do offline deposits equally throughout the year.

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.

FAQ on ELSS vs PPF

Is there tax on ELSS after 3 years?

Gains from ELSS after 3 years are mostly taxed at 10% if it crosses more than Rs. 1 lakh. There is, however, no tax on the amount up to Rs 1 lakh.

What is the length of the ELSS lock-in period?

The ELSS lock-in period is 3 years from the date of investment. This means your money is locked for 3 years and cannot be withdrawn before then.

Eligibility for ELSS and PPF

ELSS and PPF are open to most Indian residents having a PAN and a bank account. NRIs and Hindu Undivided Families cannot invest in PPF. There is no age or income limit for investing in ELSS, but it involves the stock market—so consider an investment time frame long.

Is the ELSS maturity amount taxable?

You can redeem your ELSS units after 3 years. The growth on your investment (gains) is taxable. However, only the gains exceeding Rs 1 lakh are taxed at 10% after 3 years. The original investment amount and up to Rs 1 lakh in gains are not taxed.

Is PPF Taxable?

No, PPF investments enjoy triple tax benefits! This means your contributions (up to Rs 1.5 lakh annually), interest earned, and the entire maturity amount are all exempt from income tax in India.

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