Should You Go With The PPF Or The ELSS?
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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.
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-links 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.
Benefits Of ELSS
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.
Benefits Of PPF
- 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.
Conclusion
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.
Also Read: Here Are Some Frequently Asked Questions About Life Insurance Riders.
