For individuals aiming to build long-term savings while enjoying tax benefits, selecting the right investment instrument is crucial. Equity Linked Savings Scheme (ELSS) and Public Provident Fund (PPF) are two popular options that not only provide high returns but also offer significant income tax benefits. These schemes are perfect for those looking to grow their wealth and foster a disciplined saving routine.
In this article, we will explain ELSS and PPF, compare their key differences, and guide you on which is better for maximizing tax savings.
Understanding Equity Linked Savings Scheme (ELSS)
ELSS (Equity Linked Savings Schemes) is the only type of mutual fund eligible for deductions under Section 80C of the Income Tax Act, 1961. It has the shortest lock-in period (3 years) among all Section 80C investment options.
ELSS mutual funds offer strong potential for long-term wealth creation, appealing to those with a higher risk tolerance. A significant portion of an ELSS investment is allocated to equities, making its performance linked to market conditions and subject to volatility.
However, historically, ELSS has provided better returns compared to traditional instruments like PPF (Public Provident Fund) and FD (Fixed Deposit).
Understanding Public Provident Fund (PPF)
The Public Provident Fund (PPF) is a government-supported long-term investment plan in India. PPF accounts can be opened at post offices or commercial banks, and offer both income tax benefits and attractive returns.
The interest rate for this scheme is set by the Government of India every quarter. Currently, it stands at 7.1% for 2024. It’s important to note that PPF accounts are not available for Hindu Undivided Families (HUFs) and Non-Resident Indians (NRIs).
When deciding between PPF and Equity Linked Savings Schemes (ELSS), these restrictions should be considered.
Key Differences Between ELSS Mutual Funds vs PPF
Let’s compare ELSS and PPF based on various investment factors:
| ELSS (Equity-Linked Savings Scheme) | PPF (Public Provident Fund) | |
| Investment Type | Equity-based mutual fund | Government-backed savings scheme |
| Risk Level | As an equity fund, investments are exposed to market risks. | As a Government of India initiative, investments in PPF are secure. |
| Returns | Market-linked, potentially higher | Fixed, currently around 7%-8% |
| Lock-in Period | ELSS investments come with a lock-in period of 3 years, and premature withdrawal is not allowed during this time. | A lock-in period of 15 years applies, but partial withdrawals are allowed starting from the 5th year. |
| Tax Benefits | Up to ₹1,50,000 under Section 80C | Up to ₹1,50,000 under Section 80C |
| Liquidity | Higher (after 3 years) | Lower (partial withdrawals after 5 years) |
| Ideal for | Investors with a higher risk tolerance | Conservative investors |
Which is Better for Tax Savings?
When it comes to tax savings, both ELSS Mutual Funds and PPF offer benefits under Section 80C of the Income Tax Act, allowing deductions up to ₹1,50,000. However, the choice between the two depends on your financial goals and risk tolerance.
ELSS Mutual Funds vs PPF are ideal for those looking for potentially higher returns and are willing to take on market-related risks. They have a shorter lock-in period of 3 years, making them more liquid compared to PPF.
On the other hand, PPF is a safer, government-backed option with fixed returns, suitable for conservative investors with long-term goals. It has a longer lock-in period of 15 years but offers assured returns and tax-free interest.
Ultimately, if you have a higher risk appetite and seek higher returns, ELSS might be the better choice. If you prefer stability and guaranteed returns, PPF would be more suitable. Balancing both could also be a strategic approach to diversify your investment portfolio.
Conclusion
Both ELSS Mutual Funds and PPF offer valuable tax benefits but cater to different investment needs. ELSS provides the potential for higher returns and has a shorter lock-in period, while PPF offers guaranteed returns and longer-term security. Remember, your choice to invest in PPF or buy mutual funds online should be based on your risk tolerance and financial goals.