ELSS vs PPF

Looking for an investment scheme that offers gains with tax-saving? Here’s a comparison between ELSS and PPF to help you.
EXPLORE FUNDS
ELSS vs PPF
EXPLORE FUNDS
4 mins
08-May-2024

Equity Linked Savings Scheme (ELSS) and Public Provident Fund (PPF) are two investment options known for their potential for high returns and tax-saving benefits. These plans are particularly suited for individuals aiming to boost their savings by capitalising on wealth growth and fostering disciplined saving practices.

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.

Difference between ELSS and PPF

Listed below are key some differences between ELSS mutual funds and PPF:

  • ELSS has a shorter lock-in period of three years, while PPF has a longer lock-in period of 15 years.
  • ELSS has higher returns potential, but also higher risk and volatility, while PPF has lower returns, but also lower risk and stability.
  • ELSS is taxed at 10% on long-term capital gains exceeding Rs. 1 lakh per year, while PPF is tax-free at all stages.

ELSS vs PPF - A table comparison

Feature ELSS (Equity Linked Savings Scheme) PPF (Public Provident Fund)
Risk High Low
Returns Potentially high (market-linked) Fixed (determined by government)
Lock-in period 3 years 15 years (extendable by blocks of 5 years)
Partial withdrawal Not allowed within 3 years Allowed after 5 years (with conditions)
Tax benefits Deduction under Section 80C (up to Rs. 1.5 lakh). Capital gains taxed if exceeding Rs. 1 lakh in a year. Tax-free (EEE - Exempt on investment, interest, and maturity)
Tenure No limit on investment period Maximum 15 years (extendable)
Minimum deposit As decided by the AMC. Generally, it is Rs. 500 Minimum Rs. 500 per year
Offered by Mutual fund companies Banks and post offices


Features of ELSS

Here are some features of ELSS mutual funds:

  • 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

Here are some 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.

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Eligibility for ELSS

ELSS is open to all Indian residents, who have a PAN card and a bank account. Non-resident Indians (NRIs) can also invest in ELSS funds, subject to the Foreign Exchange Management Act (FEMA) regulations.

There is no age limit or income limit for investing in ELSS funds. You can invest in ELSS funds either as a lump sum or through a systematic investment plan (SIP).

Eligibility for PPF

PPF is open to all Indian residents, who have a valid identity proof and a bank account. However, NRIs and Hindu Undivided Families (HUFs) cannot open a PPF account. You can open only one PPF account in your name, either in a post office or a bank.

You can also open a PPF account in the name of a minor child, but the combined limit of Rs. 1.5 lakh per year applies to both the accounts.

Pros and cons of investing in ELSS vs. PPF

Here are some pros and cons on investing your money in ELSS mutual funds vs investing in PPF:

Pros of investing in ELSS:

  • Shorter lock-in period of three years, which allows more liquidity and flexibility.
  • Higher returns potential, as ELSS funds invest in equity markets, which can offer higher growth in the long run.
  • Option to invest through SIP, which helps in averaging the cost of investment and benefitting from the power of compounding.
  • Diversification of portfolio, as ELSS funds invest in different sectors and companies, which reduces the overall risk.

Cons of investing in ELSS:

  • Higher risk and volatility, as ELSS funds are subject to market fluctuations, and the returns are not guaranteed or fixed.
  • Taxed at 10% on long-term capital gains exceeding Rs. 1 lakh per year, which reduces the net returns.
  • No premature withdrawal option, which means you cannot access your money before the completion of three years.

Pros of investing in PPF:

  • Longer lock-in period of 15 years, which encourages long-term savings and discipline.
  • Guaranteed and stable returns, as PPF offers a fixed interest rate, which is decided by the government every quarter, and is currently 7.1% per annum (Q3 of FY 2023-24).
  • No market risk, as PPF is backed by the government, and the principal and interest are fully secure.
  • Tax-free at all stages, as the interest and the maturity amount are exempt from tax, making it an EEE (exempt-exempt-exempt) instrument.

Cons of investing in PPF:

  • Lower returns potential, as PPF offers a lower interest rate than ELSS funds, and may not beat inflation in the long run.
  • Fixed by the government every quarter, which means the interest rate can change depending on the country’s economic situation and may not be favourable for the investors.
  • No flexibility to change the investment amount, as PPF has a minimum and maximum limit of Rs. 500 and Rs. 1.5 lakh per year, respectively, and you cannot invest more or less than that.
  • Partial withdrawal option only after seven years, which means you cannot withdraw your entire amount before the completion of 15 years, and only a certain percentage of the balance is allowed to be withdrawn after seven years.

How to invest in ELSS and PPF?

Investing in Equity Linked Saving Schemes (ELSS) and Public Provident Fund (PPF) involves straightforward steps. ELSS, essentially a mutual fund, qualifies for deductions under Section 80C. Various Asset Management Companies (AMCs) provide ELSS schemes, offering investors choices for tax-saving investments. On the other hand, PPF accounts, offered by banks, can be conveniently opened with the same bank where you hold your savings account, streamlining the investment process. Whether opting for ELSS or PPF, it's essential to explore different schemes, consider your financial goals, and make informed investment decisions.

PPF and ELSS - Which is a better investment option for you

The choice depends on your:

  • Risk tolerance: Can you handle market ups and downs?
  • Investment horizon: How long can you stay invested?
  • Tax goals: Need tax breaks now or for future growth?
  • Diversification: Looking to balance risk and reward?

Here are a few details about PPF and ELSS to help you decide:

  • PPF: Offers guaranteed returns, tax benefits, and a long lock-in period (15 years). Ideal for risk-averse investors with long-term goals and a focus on security.
  • ELSS: Invests in stocks, potentially offering higher returns but with market risk. Shorter lock-in (3 years) and tax benefits make it attractive for growth-oriented investors with a longer time horizon.

Conclusion

So, ELSS and PPF are tax-saving options with different advantages. ELSS might be better for those wanting higher returns & are willing to take more risk, whereas PPF provides stability and security for long-term savings. A smart investing choice could be to diversify your investment and get the best of both.

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Frequently asked questions

Which is better – ELSS or PPF?

The choice between ELSS and PPF depends on your financial goals and risk tolerance. ELSS may offer potentially higher returns with more risk, suitable for those seeking growth. On the other hand, PPF provides stability and security, making it preferable for conservative investors focused on long-term savings.
Both offer tax benefits under Section 80C of the Income Tax Act, but ELSS has a shorter lock-in period of three years, while PPF has a longer lock-in period of 15 years. You can invest in both and diversify your portfolio or opt for the one that suits your profile better.

What is the length of the ELSS lock-in period?

The lock-in period of ELSS is three years from the date of investment. This means you cannot redeem or sell your ELSS units before completing three years. However, you can continue to invest in ELSS even after the lock-in period is over.

Is PPF paid monthly or annually?

You can make deposits into your PPF account at any time during the financial year, up to a maximum limit of Rs. 1.5 lakh.

Is PPF taxable?

No, PPF is not taxable. On the contrary, you can claim a deduction of up to Rs. 1.5 lakh under Section 80C for your PPF contributions and the income from PPF is also tax exempt.

Is the ELSS maturity amount taxable?

Yes, the ELSS maturity amount is taxable. The long-term capital gains (LTCG) on ELSS are tax-exempt up to Rs. 1 lakh every fiscal year, but any gains above this limit are taxable at 10%.

How to invest in ELSS and PPF?

You can invest in ELSS through various online platforms, such as the Bajaj Finserv platform. You can also invest in ELSS through the systematic investment plan (SIP) mode, where you invest a fixed amount every month or at regular intervals.
You can open a PPF account in any post office or selected branches of nationalised banks. You can also transfer funds online to your PPF account from your bank account.

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