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Difference Between ELSS and PPF

Personal Finance

Certain saving schemes such as PPF(Public Provident Fund) and ELSS (Equity Linked Saving Schemes) help to enable the benefits of the tax.

The article will present a comparative analysis of the investment schemes and help investors select the right one.

ELSS: A Brief about the Scheme

ELSS, an acronym for Equity Linked Savings Scheme, is a type of mutual fund that invests in direct equity and helps in saving up to Rs.1.5 lac in tax rebate. Higher returns in fewer periods and tax rebates have made the scheme highly popular today.

The lock-in period under the scheme is three years, which means you can liquidate the investment in three years from its purchase.

To get the maximum returns when investing in ELSS funds, you need to keep the investments for a longer period. If you invest in a Systematic Investment Plan, each installation will have a lock-in of three years, which means each installation will have varied maturity dates.

Functioning of ELSS Funds

ELSS funds can be considered diversified funds involving equity. When you invest in ELSS, you invest in listed companies for a specific objective defined by the fund’s investment objective. People choose stocks across industry sectors and market capitalization, such as Small Caps, Mid Caps, and Large Caps.

The funds are made to maximize capital gains over time. The fund manager picks stocks after conducting in-depth market research. It helps in delivering good portfolio returns for the long term.

Advantages of ELSS Mutual Fund

Here are the advantages you receive when you invest in ELSS mutual funds.

Potentially higher returns

The scheme offers its investors significantly higher wealth in a medium-to-long-term investment horizon. Since its inception into the market, ELSS has delivered the highest returns in the category of tax-saving products. Earlier data indicates that the scheme generated approximately 11-14% returns in three-year and five-year periods, respectively.

SIP Option

When you invest in ELSS, you can start investing a low amount of INR 500 per month through a Systematic Investment Plan (SIP). Besides, you can conveniently start and stop the SIP. Investing in ELSS is beneficial, as it offers investors enormous flexibility and convenience with small and regular investments.

Better Post-Tax Return

Investors can enjoy tax-free returns of up to INR 1 lac while investing in ELSS. Gains over the specified amount attract a nominal tax rate of 10%. Lower tax rates with higher returns ensure investors with the best post-tax returns.

PPF: A Brief About The Scheme

A PPF account or Public Provident Fund scheme is a traditional and popular scheme. It is a long-term saving-cum-investment product, combining returns, safety, and tax savings. The Finance Ministry’s National Savings Institute opened the PPF scheme to the public in 1968. Since then, it has emerged as a powerful tool for creating long-term wealth for investors.

Investors use the scheme to build a corpus for their retirement by putting aside specific capital regularly and over a long period. The scheme offers a 15-year maturity with an added facility to extend the tenure. The attractive interest rates and tax benefits make the scheme the biggest favourite with a small saver.

The Functioning of the PPF Account

An adult can open a PPF account for themself or a minor for 15 years. The amount deposited in the account ranges between INR 500 and INR 1.5 lac per financial year. You can deposit the amount as a whole or even in instalments. Investors must deposit the amount every financial year during the tenure, and the investor receives an exemption from income tax under section 80C.

The minimum amount you must invest in the scheme is INR 500 every financial year to keep the account activated. In certain circumstances, investors fail to pay the amount. In such a scenario, the ministry will discontinue the amount, and you require paying a payment of INR 50 along with the minimum deposit of INR 500 to reactivate it.

The PPF interest rate levied is 7.1% per annum to the deposit, compounded annually. You can even take a loan on your account balance. The scheme allows investors to make partial and premature withdrawals on the account balance, subject to certain conditions. After maturity, investors have the option to close the account or extend the tenure of the account with or without making additional investments.

Benefits of PPF Account

Enlisted are the benefits of having a PPF account:

Low-Risk Instrument

Since the government guarantees PPF returns and deposits, it is one of the safest investment options nationwide. PPF is a popular investment option even with low returns, as it offers the safety of capital and returns.

Tax Benefits

PPD investments fall under exempt- exempt- exempt (EEE) category. It means the government does not levy taxes at any state of PPF. An investor wanting to make deposits up to INR 1.5 lakhs can avail of tax benefits under the Income Tax Act 1968. The interest credited every month and the maturity amount are tax-free.

Fixed Returns

PPF deposits offer fixed returns in the form of interest rates every year. The government fixes the PPF interest rate quarterly. The average return on PPF for the past five years has been approximately 7%.

ELSS or PPF: Which Is The Right Choice?

Since both schemes help save taxes, investors must invest in the right scheme. When selecting a scheme for investment, investors must consider certain factors like risk appetite, return expectations, and their time horizon.

If you are risk-averse and are okay with a 15-year lock-in period, PPF is the best choice. However, ELSS is an excellent option if you can take slightly more risk to earn higher returns. Investing for a longer period helps in reducing the risk.

Wrap Up

Now you should know what the advantages and disadvantages of both the ELSS and the PPF schemes are. But these advantages and disadvantages usually vary depending on what people want. While one person would be seeking a long-term investment, the other must be seeking one that is relatively more immediate (more than 3 years).

Due to this, the ways to invest are very different. So, compare these two based on what you need and choose the best one. For more blogs like this, you can visit the Piramal Finance website and explore their products and services.