ELSS Vs PPF- Which One Is a Better Option For Investment

Despite the fact that both the Equity Linked Savings Scheme (ELSS) and the Public Provident Fund (PPF) are tax-advantaged savings schemes, investors frequently struggle to determine which investment instrument is best for them. Equity Linked Saving Scheme (ELSS) is a type of mutual fund that qualifies for tax breaks under Section 80C of the Income Tax Act of 1961. ELSS has grown in popularity in recent years due to higher returns and the shortest lock-in period in the tax-saving category.

Equity Linked Savings Scheme

The Equity Linked Savings Scheme (ELSS) is a type of mutual fund that qualifies for tax breaks under Section 80C of the Income Tax Act of 1961. The ELSS has grown in popularity in recent years due to its higher yields and the shortest lock-in period among tax-advantaged investments.

ELSS Features

• High Returns: ELSS has delivered one of the highest returns in the tax-saving product category. Looking at historical data, ELSS schemes have generated 11-14% returns over 3- and 5-year time frames. However, because ELSS returns are market-linked, they cannot be guaranteed.
• Tax Benefits u/s 80C: Under Section 80C of the Income Tax Act of 1961, ELSS investments of up to Rs.1.5 lakh per year are tax deductible. ELSS investments can result in tax savings of up to Rs. 46,800. In contrast to PPF, which is tax-free at all stages, ELSS returns are taxable at 10% if the gain in a calendar year exceeds Rs. 1 lakh.
• Lowest Lock-in: ELSS investments have a 3-year lock-in period in the tax-saving category, making them a more liquid option. You can actually redeem your ELSS fund investment in as little as three years.
• SIP Option: Through the Systematic Investment Plan, you can begin investing in ELSS with as little as Rs. 500 per month (SIP). You can start and stop the SIP whenever it is convenient for you. It provides enormous flexibility and convenience while making small but consistent investments.

Public Provident Fund

The Public Provident Fund (PPF) is a government-sponsored savings scheme that guarantees returns and provides additional tax benefits under Income Tax Act of 1961 Section 80C. Every quarter, the government sets the interest rate on PPF. The current quarter Q1 (April-June) FY-22-23 interest rate has been set at 7.1 percent.

PPF Features

• Low-Risk Instrument: PPF deposits and returns are guaranteed by the government, making it one of the safest investment options available in the country. Despite its low returns, PPF has been a hugely popular investment option due to its capital safety and returns.
• Tax Benefits: PPF investments fall under the exempt-exempt-exempt (EEE) category, which means that PPF deposits and returns are not taxed at any stage. The investor can obtain tax benefits under Section 80C of the Income Tax Act by making PPF deposits of up to Rs. 1.5 lakh. Furthermore, interest earned each month is tax-free. Finally, the maturity amount is tax-free.
• Lock-in Period: PPF deposits are subject to a 15-year lock-in period. However, you can borrow against your PPF deposits from the third to sixth fiscal year following the year of account opening. Furthermore, beginning in the sixth year, you can make a partial withdrawal on certain pre-specified grounds.
• Fixed Returns: Deposits in a PPF earn a fixed return in the form of an annual interest rate. PPF interest rates are set by the government on a quarterly basis. The average return on PPF has been around 7% over the last five years.
• Investment and Withdrawal: The minimum investment in a PPF is Rs 500, and the maximum investment is Rs 1.5 lakh. You can deposit funds into your PPF account up to 12 times per year. Premature closure is permitted only in exceptional circumstances, such as serious illness. Partial withdrawals are permitted after 5 years from the end of the fiscal year in which the account is opened.

ELSS vs PPF: which one is better to invest in?

While both schemes are tax-efficient, it is critical to select one based on return expectations, risk tolerance, and investment time horizon. PPF is best suited for risk-averse individuals who can afford a 15-year lock-in period.

ELSS are suitable for investors who are willing to take a moderate risk in order to earn higher returns. The best way to keep ELSS risk to a minimum is to stay invested for the long term.