If you are looking for a tax-saving investment option, you may have come across two popular choices: ELSS mutual funds and PPF. Both the schemes offer tax benefits under Section 80C of the Income Tax Act, 1961, but they have different features, returns, and risks. In this article, we will compare ELSS mutual funds and PPF and help you decide which one is better for you.
What is ELSS?
ELSS stands for Equity Linked Savings Scheme. It is a type of mutual fund that invests mainly in equity and equity-related securities. ELSS funds have a lock-in period of three years, so you cannot withdraw your money earlier. ELSS funds offer the potential to earn higher returns than other fixed-income instruments, but they also carry higher risk and volatility.
What is PPF?
PPF stands for Public Provident Fund. It is a government-backed savings scheme that offers guaranteed returns and tax benefits. PPF has a lock-in period of 15 years, which can be extended to 5 more years. You can deposit a minimum of Rs. 500 and a maximum of Rs. 1.5 lakh per year in your PPF account. The interest rate on PPF is fixed by the government every quarter.
Features of ELSS
- ELSS funds offer tax deduction of up to Rs. 1.5 lakh per year under Section 80C.
- ELSS funds have the shortest lock-in period of three years among all tax-saving instruments.
- ELSS funds have the potential to generate higher returns than PPF and other fixed-return options, as they invest in equity markets.
- ELSS funds are subject to market risk and volatility, and the returns are not guaranteed or fixed.
- ELSS funds are taxed at 10% on long-term capital gains exceeding Rs. 1 lakh per year.
Features of PPF
- PPF also offers tax deduction of up to Rs. 1.5 lakh per year under Section 80C.
- PPF has a longer lock-in period of 15 years, which can be extended to 5 more years. Partial withdrawal is permitted from the 7th financial year.
- PPF offers guaranteed and stable returns, as the interest rate is fixed by the government every quarter.
- PPF has no market risk and is backed by the government, making it a safe and secure investment option.
- PPF is completely tax-free, as the interest and the maturity amount are exempt from tax.