PPF or ELSS – Where Should You Invest to Save Tax?

Yes, it’s that time of the year again. Tax saving season is just around the corner and your CA or company’s HR will be knocking on your door very soon for investment proofs.

Ideally, one should start investing to save taxes at the beginning of the financial year, but typically, most of us do it towards the end. Nonetheless, irrespective of when you do it, you must invest to save taxes.

And usually, the choice a taxpayer has to make under the Rs 1.5 lakh limit of Section 80C is between the Public Provident Fund (PPF) and Equity Linked Savings Scheme (ELSS). Before we give you a breakdown of these two tax-saving investments, let’s begin with a short introduction of both.

What is PPF?

The Public Provident Fund is a government-backed investment product. It was introduced way back in 1968 and has served generation after generation as a savings plus tax-saving investment instrument. PPF is a debt-oriented investment option and is entirely safe.

What is PPF?

The government offers a guaranteed return on PPF investments, which is usually modified every quarter and has hovered in the 7-8% range over the past few years. PPF investments have a lock-in of 15 years.

What are the ELSS funds?

Equity Linked Savings Schemes are equity-oriented mutual funds that offer tax-saving benefits. ELSS funds are relatively newer products that are offered by mutual fund companies (also known as asset management companies).

Since ELSS funds invest in the stock markets, they don’t offer guaranteed returns. But they are typically used to generate higher returns (in the range of 12-15%) and create wealth over the long-term. ELSS funds come with a lock-in of 3 years.

What are the ELSS funds?

This, in a gist, is what PPF and ELSS are. The table below is a comparison of both tax-saving investments on different parameters.

Comparison between PPF and ELSS

Returns7.9% (as on Dec 2019)12% to 15% (historical average)
Lock-in period15 years3 years
Tax-saving potentialRs 1.5 lakh under Section 80CRs 1.5 lakh under Section 80C
Tax on interest/returnsZeroZero
Tax on withdrawals after maturityZero10% on returns of over Rs 1 lakh in a financial year

As you can see, PPF and ELSS stand head-to-head on taxability parameters. You can invest up to Rs 1.5 lakh under Section 80C in either of the two instruments to save taxes.

But, saving taxes should not be the only purpose of making these investments. Because of their long-term nature, both of these tax-saving investments can help you create the wealth of your goals and objectives. And for that, ELSS funds trump PPF.

3 reasons to choose ELSS over PPF

  1. Potentially higher returns
  2. Lower lock-in period
  3. The existence of EPF

Potentially higher returns

The interest rate on PPF has been in decline over many years. Years back, it was 12%, which has now come down to 7.9%. On the other hand, ELSS funds have given an average yearly return of 12% to 15%.

Here’s what would have happened if you had Rs 1 lakh in both ELSS funds and PPF between January 2015 to December 2019.

3 reasons to choose ELSS over PPF: Higher Returns

As is apparent, the difference in returns is startling. PPF may be risk-free, but with a few calculated risks, ELSS funds can help you create real wealth and comfortably beat inflation over the long-term.

Lower lock-in period

15 years seems like a lifetime, doesn’t it? Especially when you compare it to 3 years. A lower lock-in period means you have quicker access to your money. Sure, in times of dire needs, you can withdraw prematurely from PPF, but that comes with its own penalties.

Hence, if 15 years seems like too long a period for you to invest in one instrument, it’s best that you choose ELSS funds instead.

The existence of EPF

If you are a salaried individual, you already will be having the Employee Provident Fund (EPF) component in your salary package. EPF is similar to PPF. Your employer would be deducting a part of your salary as your EPF contribution and making an equal contribution on your behalf as well.

This pretty much takes care of the debt component of your tax-saving investments and you don’t really need to invest in PPF over and above that as well.

The existence of EPF

The final word

In a nutshell, if the choice is between PPF and ELSS funds, for most taxpayers, the latter would make more sense. Investing to save taxes should serve the dual purpose of tax-saving and wealth-building. And since ELSS funds can earn you higher returns as compared to PPF, they should be a major part of your Section 80C investments.

Source: Wealthy.in

Leave a Reply