ELSS or PPF: Which One Should You Invest in?

Since both the Equity Linked Savings Scheme (ELSS) and Public Provident Fund (PPF) are saving schemes eligible for tax benefits investors may be confused in picking out one of the schemes.

While PPF has been a traditionally popular investment option, ELSS is steadily gaining traction due to better risk adjusted returns and lowest lock-in period.

What is ELSS?

Equity Linked Saving Scheme (ELSS) is a type of mutual fund that is eligible for tax deduction benefits under the section of 80C of the Income Tax Act, 1961. Due to market linked returns and lowest lock-in period in the tax-saving category, ELSS has become more popular in recent times. You can invest in ELSS either in lump sum or through Systematic Investment Plans (SIP). Though ELSS funds are subject to market risks, historical data shows that equity has been best performing asset class over long investment horizon

What is PPF?

Public Provident Fund (PPF) is a government-backed saving scheme which provides guaranteed returns and added tax benefits u/s 80C. PPF pays interest on accumulated deposits and accrued interest. PPF interest rates are linked to Government bond yields and may be revised on quarterly basis. If you want to invest in the PPF account, you can open a PPF account in a post office or any bank.

The article aims to present a comparative analysis of the two schemes to help investors in selecting the right one for them.

Tax Benefits u/s 80C:

Investments upto Rs.1.5 lakh a year in ELSS and PPF are eligible for tax deduction benefits under section 80C of the Income Tax Act, 1961.

PPF investments come under exempt-exempt-exempt (EEE) category.

ELSS returns are taxable at 10% if the gain exceeds Rs. 1 lakh in the year.

Earlier ELSS was also tax-exempt after 1 yr, but with budget 2017-2018, now any gains in equity mutual funds or stocks are taxable @10% when you sell them, but you get an exemption of Rs 1 lac per yr. This means that if your profit after selling ELSS is Rs. 4 lacs, then you have to pay a 10% tax on 3 lacs.

Lowest Lock-in:

ELSS investment comes with a lock-in of only 3 years in the tax-saving category, making ELSS investments a relatively more liquid option. You can actually redeem your ELSS fund investment in just 3 years.

PPF investments are locked in for 15 yrs, but some partial money can be withdrawn after 7 yrs.

Liquidity:

PPF has a minimum investment of Rs 500 and a maximum investment of Rs 1.5 lakh. You can make deposits in the PPF account up to 12 times in a year. Premature closure is only allowed on limited grounds such as serious ailments. You can take a loan on the PPF deposits from 3rd to 6th financial year from the year of account opening. Further, you can make a partial withdrawal from 6th year onwards but only on some pre-specified grounds. Withdrawals not exceeding 50% of 4th year balance are permitted after a lock-in period of 7 years.

ELSS mutual funds, on the other hand, are the most liquid investments u/s 80C. You can redeem your ELSS units partially or fully after the lock in period of three years is complete. However, it needs to be mentioned here that, you do not necessarily have to redeem your ELSS units after the expiry of the lock-in period. You should redeem according to your financial needs and invest in ELSS as per your financial goals.

While both the schemes are tax saving, it is important to pick a scheme based on return expectations, risk appetite and investment time horizon. PPF is suited for individuals who are absolutely risk-averse and can afford a 15-year lock-in period.

Whereas those investors who are willing to take a moderate risk to earn higher returns can opt for ELSS. The best way to reduce risk in ELSS to its minimum is by staying invested for the long term.

Disclaimer: The views expressed here in this Article / Video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The Article / Video has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of the Article / Video should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. None of the Quantum Advisors, Quantum AMC, Quantum Trustee or Quantum Mutual Fund, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in the Article / video.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

PPF can be extended indefinitely in blocks of 5 years by submitting Form H. Submitting form H is required if you wish to continue investing upto 1.5L max every year and earn interest on that.

Without submitting Form H to extend PPF tenure in blocks of 5 years, you can continue the PPF account as is and you can still credit money to the account but interest will be earned only on up to 15 years contribution.

After completing 15 years, you can withdraw upto 60% of the PPF balance. One withdrawal per year is allowed as per year 2020 changes in the rules. Form C is needed for this.

But if you had not submitted Form H to extend PPF your money can keep on earning interest without any obligation to invest every year and you can withdraw any amount anytime.

The best part of PPF is EEE status for taxation. And risk-free tax-free compounding. If one is a salaried employee, he may choose to rather make voluntary contribution in EPF which earns a little more interest than PPF.

My view is if one starts a PPF account early in life, say you do it for your kid, by the time he becomes an adult, a tax-free corpus would be ready. For a girl child, Sukanya Samridhhi Scheme earns a little more interest and still enjoys the EEE in taxation. Think of these as Tax-free alternate to Debt Mutual Funds. If you invest in these govt schemes, you need not invest in any Debt Mutual Fund.

My thumb rule would be - for tax-saving purpose, calculate your life insurance premium, EPF contribution and top up with Voluntary contribution to EPF to reach 1.5 lakh total annual investment under section 80C. If not a salaried person, invest in PPF (if account was opened early in age so you are extending in 5 years block) to fulfill total 1.5L deficit.

If both the above conditions don’t fulfill, then only choose ELSS fund only to fulfill 1.5L deficit under section 80C. There too look for lower TER because effective TER for 3 years becomes an expensive affair. Quantum ELSS Fund’s TER is 1.29% which makes it 1.29 x 3 = 3.87% total for the 3-year lock-in period.

Hoping, Zerodha AMC brings in Nifty 50 based ELSS fund and tax-saving ETF in 2021 which would be quite cost effective and yet give better results than all the actively managed ELSS funds.

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