ELSS vs PPF: Comparison, Returns and Tax Implications

People looking for long-term investments in India have a plethora of choices, such as the Equity Linked Savings Scheme (ELSS) and the Public Provident Fund (PPF). Both of these schemes offer numerous features for the investors which can boost their savings. However, they have different returns potential and risk levels that investors should be aware of. 

Which one will you choose between ELSS and PPF? This blog provides a detailed comparison of ELSS vs PPF, including their returns, tax implications, and other benefits.

What is ELSS?

The ELSS is the only type of mutual fund scheme that offers tax benefits under the Section 80C of the Income Tax Act, of 1961. A significant part of this scheme invests in the equities of the market. Since the performance of ELSS is market-linked, the returns are subject to market risk.

What is PPF?

The PPF is a government-backed scheme that offers guaranteed returns for investors. With a lock-in period of 15 years, the PPF allows investors to make savings for old age. All Indian residents except NRIs can use this investment scheme. The PPF provides fixed and assured returns that does not change due to market fluctuations.

Features of ELSS

Considering ELSS vs PPF, it is important to evaluate the features of ELSS. Below are the features that you can get while investing in an ELSS:

• An ELSS is one of the best tax-saving investment options that provides potentially higher returns and a shorter lock-in period.
• Under Section 80C of the Income Tax Act, 1961, contributions up to ₹1,50,000 each year in an ELSS fund are tax-exempt.
• Investors can continue to invest in the ELSS scheme even after they have completed the lock-in period of three years.
• Investors do not have to pay taxes on gains up to ₹1.25 lakhs per year from investments in ELSS funds. 
• You may start investing in ELSS with a minimum amount of ₹500 each month through a Systematic Investment Plan (SIP). You can stop this SIP whenever you want. This offers flexibility and convenience among investors for small and regular investments.
• Although there are more risks involved with ELSS when compared to a PPF or a Fixed Deposit (FD), the returns are potentially higher as well.

Do you prefer safer investment options than ELSS? Download the Stable Money application to earn interest rates up to 9.50% from FDs. You do not have to visit the bank since it offers the convenience of investing online.

Features of PPF

To evaluate the comparison of ELSS vs PPF more deeply, let us discuss the features of PPF:

• The PPF is one of the safest investment options as the deposits and returns are guaranteed by the government. It is a popular investment option due to its safety of capital and returns.
• Investing in PPF allows investors to avail the benefit of the exempt-exempt-exempt (EEE) category. It means the PPF returns are not taxed. PPF deposits up to ₹1.5 lakh allow investors to enjoy the tax deductions under section 80C of the Income Tax Act. Moreover, the maturity amount of this scheme is also tax-exempt.
• There is a mandatory lock-in period of 15 years on PPF deposits. Investors can take a loan against their PPF deposits from the 3rd to 6th financial year from the year of account opening. They can also make a partial withdrawal from the 6th year onwards based on some conditions.
• Investors can invest a minimum amount of ₹500 and a maximum of ₹1.5 lakh for investing in a PPF. They can make deposits up to 12 times in the PPF account in a year. Investors can also opt for premature withdrawals from the 5th year onwards.
• PPF offers fixed returns for investors every year. The interest rate on PPF is determined by the government every quarter.

Difference Between PPF and ELSS

Understanding the difference between ELSS vs PPF is crucial for investors to conduct effective financial planning. The table below highlights the key differences in ELSS vs PPF  based on some parameters:

Tax Implications of PPF vs ELSS

While comparing the ELSS vs PPF, the aspect of tax implications is crucial to understand before investing in any one of them. 

An ELSS allows you to get ₹1.25 lakh tax-free capital gains in a financial year. If your capital gains exceed ₹1 lakh, you have to pay 12.5% tax on it. You can avail the tax exemption for each financial year after the end of the lock-in period. You also get tax deductions to an upper limit of ₹1.5 lakh under Section 80C of the Income Tax Act. 

On the other hand, PPF investments come under the EEE category. This allows investors not to pay any taxes for interest income and the maturity amount. While making PPF deposits, investors can avail tax benefits of up to ₹1.5 lakh under Section 80C. The credited interest every month is also tax-free.

Therefore, if you are looking for a more tax-friendly investment option, PPF is the option you should choose between ELSS vs PPF. On the other hand, an ELSS offers the benefit of the shortest lock-in period among any Section 80C investments. 

How to Invest in ELSS and PPF?

After the comparison of ELSS vs PPF, it is also important to know how to invest in both schemes. The process of investing in ELSS and PPF is straightforward. You can use numerous channels to invest in ELSS, such as online investment platforms, mutual fund houses, or the help of a financial advisor.

However, an SIP is one of the most convenient options where you have to invest a fixed amount regularly to increase your investment over time and reduce market risk.

On the other hand, you may open a PPF account by visiting any designated bank or post office. You can deposit the amount by making online payments to the banks.

PPF or ELSS: Which is Better for You?

These comparisons in ELSS vs PPF allow you to choose the better investment option to make financial planning for your future. Since both the schemes offer tax-saving features, you must pick one of them based on return expectations, your risk appetite, and your time horizon.

If you do not like to take risks and can afford the lock-in period of 15 years, PPF can be a great option for you. However, if you are willing to take a moderate risk to maximise your returns, you can opt for ELSS.

Final Words

The comparative analysis between PPF and ELSS is essential for investors to make informed choices between ELSS vs PPF. It is completely upon the investors to choose any one because both of them offer unique features.

You can also download the Stable Money application to invest in better investment options like ELSS or PPF. You do not have to open any bank account to invest in its FDs and bonds.