Investors often get confused in selecting tax saving investment options. In this article, we will compare PPF that is public provident fund vs ELSS which is an equity-linked saving scheme.
Both are very efficient tax-saving instruments, however different in nature. you can select any one of them that suits your risk profile and financial goals. This article will help you evaluate PPF vs ELSS.
Definition and understanding of PPF and ELSS
- PPF or Public provident fund is a small savings scheme by the government of India. Similar to a bank account, one needs to open a PPF account where he or she can deposit funds and PPF account provides interest on the deposit funds.
- ELSS or equity-linked saving scheme are equity mutual funds that are exempted from tax. ELSS is a very popular form of tax saving instruments because of their return capability. Like regular mutual funds, you can start a SIP in ELSS funds or invest lumpsum amount.
Exemption Limits in PPF vs ELSS
Investment in both PPF and ELSS are exempted under section 80C under the income tax act 1961. Exemption limit under section 80C is maximum INR 1,50,000.
Only maximum up to INR 1,50,000 can be exempted from income tax however that absolutely does not mean that you can only invest up to INR 1,50,000. People often invest more than the stipulated amount sheer because they like the investment options available. They are generally safer compared to other equity-linked investment options.
Liquidity and Lock-in PPF vs ELSS
Each tax saving investment options comes with a lock-in period meaning there is a minimum time frame before which you cannot withdraw the money or in other words money is locked-in.
PPF has a lock-in of 5 years from the date of investment while ELSS has a 3year lock-in.
ELSS, in this case, wins the battle because your money is free faster than PPF.
Returns on Investment and Risk PPF vs ELSS
Return on investment is one of the important element that influences your decision of choosing a tax saving instrument.
PPF account provides an interest rate of 7.1% which is compounded annually. Whereas ELSS are equity-linked and come with a slightly higher risk. ELSS can provide returns up to 8% – 15% over a long period of time.
PPF is comparatively a very safe option whereas ELSS has some risk. But the rule of the land is High Risk = High Return
Tax Efficiency PPF vs ELSS
Here comes the most important part who is more tax efficient. Now lets deep dive a little to understand this.
Both PPF and ELSS will compound your money meaning if you invested INR 100 in both, this money will grow to let’s say INR 120.
Invested = 100
Current Value = 120
Profit = 20
Now the profit of INR 20 also becomes your income right? because you made that money by investing money.
Even though we hate this but this INR 20 is again taxable.
So let’s evaluate PPF or ELSS which instrument is more tax-efficient…
The interest earned under PPF is totally tax exempted however the returns made in ELSS attract a 10% long term capital gain tax. There arguments that this makes PPF much better option and more tax-efficient, but lets numbers and facts win.
Take a look at the following table PPF vs ELSS
| Details | PPF (7.1% Return) | ELSS (8% Return) | ELSS (10% Return) | ELSS (13% Return) |
| Invested Amount | ₹1,50,000 | ₹1,50,000 | ₹1,50,000 | ₹1,50,000 |
| Value after 1 years | ₹1,60,650 | ₹1,62,000 | ₹1,65,000 | ₹1,69,500 |
| Value after 2 yeas | ₹1,72,056 | ₹1,74,960 | ₹1,81,500 | ₹1,91,535 |
| Value after 3 years | ₹1,84,272 | ₹1,88,957 | ₹1,99,650 | ₹2,16,435 |
| Value after 4 years | ₹1,97,355 | ₹2,04,073 | ₹2,19,615 | ₹2,44,571 |
| Value after 5 years | ₹2,11,368 | ₹2,20,399 | ₹2,41,577 | ₹2,76,365 |
| Profit | ₹61,368 | ₹70,399 | ₹91,577 | ₹3,12,293 |
| Tax on Profit | NIL | 10% | 10% | 10% |
| Tax Amount | 0 | 7,040 | 9,158 | 31,229 |
| Net Profit | 61,368 | 63,359 | 82,419 | 2,81,063 |
Feature Comparison PPF vs ELSS
| Parameters | PPF | ELSS |
| Risk | Zero or No Risk | Market Risk |
| Return | Normal | Inflatation Beating Returns |
| Liqudity | 5 years Lock-In | 3 years Lock-In |
| Tax Efficient | Yes | Yes, provided gives more than 8% return |
| Exemption Limit | INR 1,50,000 | INR 1,50,000 |
| Income Tax Section | 80C | 80C |
Conclusion PPF vs ELSS which one is better?
The conclusion is ELSS is a much better option for young individuals and individuals who have a bigger risk appetite, if you are approaching your retirement or do not have a bigger risk appetite please choose PPF. A smart investor might even divide the money between two.
If you need more understanding about these instruments or about this article, please comment in the section below or write to us at investably.in@gmail.com.