When it comes to tax-saving investments like bank FDs, National Savings Certificate (NSC), National Pension System (NPS) and so on, both the Equity Linked Savings Scheme (ELSS) and the Public Provident Fund (PPF) can also be considered as a smart bet by the tax-savers. But between the two there is still some uncertainty among investors while deciding which one to opt. Although PPF has long been a familiar investment strategy, due to higher returns, ELSS is cottoning up in the modern age. Furthermore, investors should be aware that the two strategies are not identical in terms of tax advantages. Since the asset class treatment of PPF and ELSS differs significantly, we've compared their characteristics here to help investors make an enlightened decision.
Equity Linked Saving Scheme (ELSS)
Equity Linked Savings Scheme (ELSS) is a form of mutual fund that counts for a tax exemption under Section 80C of the Income Tax Act of 1961. ELSS has been increasingly common in recent years thanks to higher returns and the shortest lock-in time in the tax-saving segment. Interestingly, it provides a better potential for long-term wealth creation, and it is favoured by those with a higher risk threshold. A large chunk of the capital invested in an ELSS goes into equity shares, and the returns are market-linked. As a result, the returns are influenced by market fluctuations. In the long term, it has proven to be worthwhile. Over the 5-years, the best ELSS funds have outperformed standard instruments like PPF and FD in terms of returns. Some key considerations of ELSS are as follows.
Returns: In the category of tax-saving investments, ELSS has generated one of the best returns. According to historical records, ELSS schemes have produced 14-24 per cent returns over 3 and 5 years according to the data of Value Research. ELSS returns, on the other hand, are market-linked and hence cannot be promised.
Tax benefits: Section 80C of the Income Tax Act, 1961 allows for tax deductions on ELSS investments up to Rs.1.5 lakh per year. ELSS returns, on the other hand, are taxable at 10% if the gain exceeds Rs. 1 lakh in the year, unlike PPF, which is tax-free at all stages.
Lock-in period: In the tax-saving category, ELSS investment has a three-year lock-in period, rendering it a comparatively liquid alternative.
SIP mode: The Systematic Investment Plan (SIP) allows you to start investing in ELSS with as little as Rs. 500 per month.
Risk: Because ELSS funds invest primarily in equity shares they are vulnerable to the intrinsic uncertainty of the market. This risk can be reduced by using the SIP mode to invest in ELSS.
Liquidity: ELSS provides more liquidity than other Section 80C tax-saving investment options because it has a three-year lock-in term. Although staying invested in ELSS schemes for the long term is always recommended, having the opportunity to redeem after three years gives investors more financial stability.
5 Best ELSS Funds In Terms Of Returns
|Funds||3 year returns|
|Quant Tax Dir||22.28|
|Canara Robeco Eqt Tax Saver||20.26|
|Mirae Asset Tax Saver Dir||19.94|
|Axis Long Term Equity Dir||17.15|
|Kotak Tax Saver Dir||16.09|
|Funds||5 year returns|
|Mirae Asset Tax Saver Dir||24.53|
|Quant Tax Dir||23.39|
|BOI AXA Tax Advantage Dir||20.36|
|Canara Robeco Eqt Tax Saver||19.91|
|JM Tax Gain Dir||19.56|
|Source: Value Research|
Public Provident Fund (PPF)
Public Provident Fund (PPF) is a long-term fixed-income scheme that comes with a tenure of 15 years and is backed by the government of India. As this tax-saving instrument is government-backed, the returns are assured and are not subjected to market-linked like ELSS or NPS. The government sets the interest rates on PPF every quarter. For the present quarter, the interest rates are capped at 7.1 per cent.
Risk: PPF is among the best tax-saving investments that not only provide assured returns but also tax benefits under section 80c. PPF comes with a sovereign-backed guarantee on both the principal and interest portion since it is regulated by the government of India. Despite its low returns, PPF has become a widely accepted investment choice because of its capital safety and guaranteed returns.
Tax benefits: PPF contributions fall under the exempt-exempt-exempt (EEE) classification, which means that PPF returns, maturity amount and interest earned are tax-free. Investors who make PPF deposits of up to Rs. 1.5 lakh are eligible for tax benefits under section 80C of the Income Tax Act.
Lock-in period: The mandatory lock-in period for PPF deposits is 15 years. The most serious disadvantage of a PPF is its scarcity of liquidity. PPF enables partial withdrawal and premature closure despite its long maturity period. Starting in the seventh year of subscription, partial withdrawals are only permitted once a year. After five years, the account can be closed early for the care of emergencies.
Returns: Every year, the interest rate on PPF deposits is fixed. On a quarterly basis, the government determines the interest rate. Currently, PPF is fetching an interest rate of 7.1% which is much higher than 5-Year FDs.
Deposit cap and withdrawal: PPF allows you to contribute a minimum of Rs 500 and up to a limit of Rs 1.5 lakh. You can deposit money into your PPF account up to 12 times annually. Just a few instances, such as acute illnesses, allow for the early closure. After 5 years from the end of the year in which the account was opened, partial withdrawals are permissible.
PPF Historical Returns
|Quarter/Period||ROI in %|
|01.01.2021 to 31.03.2021||7.10%|
|01.10.2020 to 31.12.2020||7.10%|
|01.04.2020 to 30.09.2020||7.10%|
|01.07.2019 to 31.03.2020||7.90%|
|01.10.2018 to 30.06.2019||8.00%|
|01.01.2018 to 30.09.2018||7.60%|
|01.07.2017 to 31.12.2017||7.80%|
|01.04.2017 to 30.06.2017||7.90%|
|01.10.2016 to 31.03.2017||8.00%|
|01.04.2016 to 30.09.2016||8.10%|
|2013-14 to 2015-16||8.70%|
|01.12.2011 to 31.03.2012||8.60%|
|01.03.2003 to 30.11.2011||8.00%|
|01.03.2002 to 28.02.2003||9.00%|
|01.03.2001 to 28.02.2002||9.50%|
|15.01.2000 to 28.02.2001||11.00%|
|01.04.1999 to 14.01.2000||12.00%|
|1986-87 to 1998-99||12.00%|
|01.08.1974 to 31.03.1975||7.00%|
|01.04.1974 to 31.07.1974||5.80%|
PPF vs ELSS Chart
The benefits and drawbacks of investing in ELSS and PPF are summarised below.
|Risk||PPF holdings are safe because they are backed by the Government of India.||Investments in ELSS are subject to market uncertainties.|
|Returns||Every year, the government announces the rate of interest for PPF investments. For the current quarter the interest rate is kept at 7.1%.||Since the returns are market-linked, they can differ based on the scheme chosen.|
|Tax benefits||PPF comes with an EEE (Exempt Exempt Exempt) status||If your returns surpass 1 lakh after a one-year holding period, you will be subject to a 10% LTCG tax.|
|Lock-in duration||It comes with a lock-in period of 15 years, after 5-years from the date of account opening partial withdrawals are allowed||Comes with a lock-in period of 3 years with no premature withdrawal option|
|Deposit cap||With a minimum deposit of Rs 500 up to a limit of Rs 1.5 lakh can be made either in a lump sum or installments||Deposits can be made through SIP|
Generally, investors with a long-term financial goal consider investing in PPF. ELSS, on the other hand, has proven itself as an effective investment vehicle for the reasons of tax-benefits and long-term wealth formation, thanks to higher yields, liquidity, and convenience of investment. Over a longer time period, however, PPF provides significantly lower returns than ELSS. PPF is more advantageous in terms of tax gains and capital security; however, ELSS is a viable choice for higher and market-linked returns. Although both are beneficial in terms of tax savings, only PPF offers tax-free returns. PPF, on the other hand, has a much longer lock-in period than ELSS, which has a three-year lock-in period and promises better returns on investment compared to PPF. Besides that, the risk of investing in ELSS is greater than that of PPF, which offers a lower rate of return. Another thing to remember is premature withdrawal, which is approved by PPF after five years. However, ELSS does not accept partial withdrawals. While choosing which strategy to choose, consider all factors including risk apart from returns only.