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Mutual fund ELSS vs PPF: Which is the better tax saving investment?

How do you choose an investment that helps you save tax? When you research, you should ideally look at an investment that will help you build a corpus over time. Some of you may take a conservative route by investing money in a Public Provident Fund (PPF), while others may opt for an instrument such as Equity Linked Savings Scheme that may be subject to market risks but aid you in growing your corpus at a quicker rate. Both PPFs and ELSS offer tax benefits to the investor. Let us find out the best tax saving investment options between the two. But before we begin the comparative study, let us understand PPF and ELSS briefly.

ELSS mutual funds and PPF

ELSS offers tax exemption under Section 80C of the Income Tax Act. In ELSS, a major portion of the fund is invested in equities and the fund’s performance depends upon the stock market since returns accrued from ELSS funds are market-linked. PPF, on the other hand, is a more traditional investment instrument that the Government of India introduced to encourage people to inculcate the discipline of saving money, especially for their old age.
Now that we know the definitions of ELSS and PPF, let us compare the two tax-saving investment instruments to find out which is a better investment option. There are seven factors to help us make the differentiation.

ELSS vs PPF

Risk factor
PPF is backed by the government of India which makes it a safe investment, whereas ELSS funds are equity linked, which means that they are subject to market risks.

Tax benefits
PPF investments qualify for EEE (Exempt Exempt Exempt) i.e. the investor is exempt from taxes while investing, accumulating and withdrawing his investment, whereas you have to pay a 10% long-term capital gains tax on profits of over Rs 1 lakh for ELSS investments.

Returns accrued
The rate of interest on PPF investments is declared by the government of India every year. This is typically between 7% and 8% per annum. ELSS, on the other hand, is market-linked which is why the returns may vary depending upon the scheme chosen by the investor. However, ELSS investments can offer returns ranging from 12% to 14% per annum.

Lock-in period
PPF investments come with a minimum lock-in period of 15 years, with partial withdrawals permitted after the completion of six financial years. ELSS mutual funds on the other hand, have a mandatory lock-in period of 3 years with no room for premature withdrawals.

Investment amount
You may invest a minimum of ₹500 and a maximum of ₹1.5 lakh in PPF per annum. This investment can be made in lump sum or in instalments so long as it doesn’t exceed the maximum amount. With ELSS, there is no limit to how much you can invest however you are eligible for tax deduction on investments not exceeding ₹1.5 lakh per financial year.

Maximum investment tenure
You can continue to invest in PPF funds for a maximum tenure of 5 years, after which you can extend it for 5 years at a time. However, there is no maximum tenure with ELSS investments.

The verdict – ELSS vs PPF
As is evident, PPF investments are safer but they offer lower returns in the long-term as compared to ELSS. While the tax benefits are better for PPF investments, investors can probably earn higher returns with ELSS investments, so long as the investor is willing to risk market volatility. The final verdict is that although ELSS can create wealth faster for the investor in the long-term, the investment should be made as per your financial goals and personal preferences.



Disclaimer
Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.