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If you want to build a savings corpus while shaving the money that goes off as income tax– Section 80C of the IT Act gives you a few options. PPF and ELSS are two attractive options that you can consider in this regard. But which one is a better choice? Here’s what you need to know before deciding on one of them.
PPF (Public Provident Fund): 7 Features You Must Know Before Investing
The Public Provident Fund (PPF) is a government-backed savings scheme that you can use to build a savings corpus that can serve as your retirement. It is similar to the Employees Provident Fund (EPF)– you can use it to build a retirement corpus.
As per this plan, you can create a public provident fund account, into which you deposit an amount every month. You have to keep up with the monthly deposits for at least 15 years.
The deposit during the year can be factored as Section 80C Tax deductions. Here is a quick overview of the features of PPF.
Read: Things You Need to Know About EPF
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1. Investment Limits
A minimum investment of Rs 500 and a maximum of Rs 1.5 lakh for each financial year is permitted. The maximum number of instalments for investments is 12.
2. Opening Balance
You can start a PPF account with just ₹100 rupees deposit each year. Please note that If your annual investments are more than ₹1.5 lakh, it will not accrue interest, nor would it qualify for tax deductions.
3. Deposit Frequency and Method
You must make at least one deposit every year for 15 years. You can transfer the amount as cash, cheque or demand draft.
4. Nominees and Joint Accounts
You can add a nominee to your account at any point in time. But the account can be held only by one person. Shared accounts are not permitted.
5. Risk
PPF is a government-backed savings instrument and it is risk-free. The risk of maintaining a PPF account is negligible.
6. Withdrawal and Partial Withdrawal
Due to the fixed nature of PPF account returns, they are utilised to diversify an investor’s portfolio. The PPF interest and maturity amount are exempt from taxation under section 80C of the Income Tax Act of 1961.
Beginning with the sixth fiscal year, a portion of the PPF can be withdrawn.
7. Interest Rate
The current PPF annual compounded interest rate is 7.1% per year.
ELSS (Equity Linked Savings Scheme): All You Need to Know
Equity Linked Saving Scheme is a kind of diversified equity scheme. This mutual fund is used to invest in.
1. High Returns
Among tax-saving solutions, ELSS has produced one of the greatest returns. In the previous three and five years, ELSS plans have delivered returns between 11–14%. However, because ELSS returns are tied to the market, they are not guaranteed.
2. Tax Benefits Under Section 80C
Under section 80C of the Income Tax Act of 1961, ELSS investments up to Rs.1 lakh per year are eligible for tax deduction advantages. Investing in ELSS may be eligible for tax benefits of up to Rs 46,800.
In contrast to PPF, which is tax-free at every stage (even PPF returns are tax-free), ELSS returns are taxed at 10% if the gain reaches Rs. 1 lakh per year.
Read: Low-Risk vs High-Return: A Closer Look at Fixed Deposit vs Real Estate Investment
3. Low Lock-in Period
ELSS investments have the lowest lock-in period in the tax-saving category at only three years, making them a relatively more liquid alternative. The redemption period for ELSS funds is only three years.
4. Option for Systematic Investment Plan (SIP)
You can begin investing in ELSS with as little as Rs. 500 per month using the Systematic Investment Plan (SIP). The SIP can be started and stopped at your convenience. It offers a great deal of flexibility and ease when making tiny but consistent investments.
ELSS vs PPF: Comparative Advantages of ELSS and PPF
Both PPF and ELSS help you save on tax, but you must choose between the two depending on your risk tolerance, investment horizon and return objectives.
Keep in mind that PPF and ELSS belong to two asset classes – they have different financial characteristics and behave differently in the marketplace. Here are the key differences you should consider when deciding between the ELSS and PPF.
But if you were to look at these instruments from the perspective of Tax Saving through Section 80C, comparing them is useful.
Read: An All-Encompassing Answer to the Question- What is Saving?
Better Tax Benefits of PPF as opposed to ELSS
PPF is more tax-efficient than ELSS when it comes to Section 80C due to the tax-free nature of its maturity proceeds.
ELSS has a low tax liability and can be considered the second-best option in this regard.
ELSS capital gains of up to Rs 1 lakh each fiscal year are exempt from taxation. Gains on investments above Rs 1 lakh are subject to a 10% tax.
Investors can optimise their tax benefits by reaping tax-free capital gains (up to Rs 1 lakh) annually after the lock-in period and reinvesting in ELSS to get Section 80C tax savings.
Better Liquidity of ELSS in Comparison to PPF
Many investors place a significant emphasis on liquidity.
Tax savings do not need to lock up your funds for extended periods of time.
The minimum PPF tenure is 15 years, extendable in 5-year increments. After a 7-year lock-in, withdrawals of up to 50 per cent of the fourth-year balance are authorised. PPF also offers lending options under certain conditions.
ELSS mutual funds are the most liquid investments under section 80C.
After the three-year lock-in period has expired, you can redeem your ELSS units in whole or in part. However, it should be noted that you are not required to redeem your ELSS units following the expiration of the lock-in period.
Here is a quick comparison chart between the two.
Read: PFMS(Public Financial Management Systems) to Track Your Payments
Feature PPF ELSS Taxation ₹1.5L exempt ₹1.5L exempt, 10% for returns above ₹1L Lock-in 15 years 3 years Returns 7.9% (2019) Dependent on equity market performance. Lumpsum Investment Yes Yes Other forms of Investment Max. 12 instalments per year SIPs Risk Risk-free Market Linked Loan Facility Can take after 3 years. Partially after 3-year lock-in
Who is PPF For?
PPF is appropriate for risk-averse individuals who can afford a 15-year lock-in term. If you don’t want to worry about short-term risks, PPF is the best option for you.
All you need to do is to set up a PPF account with a bank of your choice and arrange for a standing order for a fixed sum to be transferred.
Who is ELSS for?
ELSS can be chosen by investors who are ready to accept a reasonable amount of risk in exchange for better returns. The most effective strategy to minimise risk in ELSS is to invest long-term.
How Can NoBroker Help
A sure-shot investment strategy is to maintain a diversified investment basket.
If you have not considered investing in Real Estate yet, Get in touch with NoBroker’s Team of Real Estate Experts. You will get all the help you need to figure out what you need to invest in to ensure the best real estate investments.
FAQs
1. Can I invest in both PPF and ELSS?
Technically you can invest in both ELSS and PPF. But keep in mind that there is an upper limit to the tax exemption that you can get. Ideally, it is best if you could invest some money in both.
2. What are the disadvantages of ELSS?
ELSS much like any other mutual fund has a yield that may fluctuate with market trends. Meanwhile, PPF assures a guaranteed return.
ELSS funds have a 3-year lock-in period. You cannot redeem the units of an ELSS fund before three years have passed. This contributes to the generation of compound returns.
3. Who should not invest in ELSS?
It is better not to invest in ELSS if
You expect guaranteed returns
You want liquidity – you cannot withdraw the fund during the 3-year lock-in period
You are scared of the stock market.
You are a senior citizen– (there are better options like the Senior Citizen Savings Scheme.)
You plan on yearly lump sum investments instead of monthly systematic investments.
In summary–If you are risk averse, it is better that you don’t invest in ELSS, especially if you are sensitive to short-term loss.
4. What is the minimum and maximum amount to invest in ELSS?
The minimum investment that you should do in order to get a tax benefit from ELSS is ₹500.
There is no maximum investment amount for ELSS. However, the annual tax advantages are limited to Rs 1,50,000. You might consider maximising your Section 80C limit by investing Rs 1.5 lakh annually.
5. How many times can I deposit in the PPF account?
You can make up to 12 deposits into your PPF account in a year. Keep in mind that you will only get Section 80C Tax benefits if the investments are less than ₹1.5 lakh.
6. What happens if I invest more than 1.5 lakh in PPF?
You cannot deposit more than₹ 1.5 in PPF at any point in time. If you were to deposit more than 1.5 lakh in your PPF account it will be rejected.
