PPF vs ELSS: Which One Is Better To Choose?

source: tnn

When it comes to choosing an effective savings scheme that also offers tax benefits, many seem to compare ELSS and PPF. Equity Linked Savings Schemes or ELSS are equity investment plans that are exposed to higher market risks but also pay higher returns. On the other hand, the Public Provident Fund or PPF is a debt instrument backed by the government. Hence it has low volatility.

So, before making the right financial choice, learn about the differences between ELSS vs. PPF.

It has the shortest lock-in period

The ELSS features a three-year lock-in period, which is the shortest under Section 80C of the Income Tax Act, of 1961. It also has a high liquidity factor for the medium term.

Easy to invest

With ELSS, you can make investments easily through monthly SIPs.

Higher returns

ELSS offers a much higher return as compared to other tax-saving investment schemes

Attractive post-tax returns

Up to a maximum of ₹1 Lakh, long-term capital gains you receive from ELSS are tax-free.  Only profits over ₹1 Lakh are subject to a 10% tax rate. Therefore, higher returns and lower tax rates together offer you the best post-tax returns.

PPF is a debt type of investment instrument that is suitable when trying to meet long-term financial goals like retirement-saving and other purposes. PPF investments are backed by the Indian government and qualify for tax benefits under Section 80C up to Rs 1.5 Lakhs.

PPF has a lengthier lock-in term of 15 years, after which it can be stretched by another 5 years, however, it allows early withdrawal starting from the sixth year.

Longer lock-in period

 The lock-in period for PPF is higher, i.e., 15 years, which you can further extend by 5 years each time with no requirement of deposit each year.

Protection of capital

he money you invest in it is absolutely safe as it is backed by the Governement under PPF plan and thus you will earn guaranteed returns. However, your PPF account is not shielded from inflation. Thus, once rates rise over the most recent assured interest rate, your deposit receives no real returns.

Premature closure of the account

Due to the lock-in period, you are generally not allowed to close your account before 15 years, except for a few cases. These exceptions include the death of the policyholder, critical disease treatment, emergency education funding or after completion of 5 years from the day the account was opened.

Availability of loan against PPF

From the third until the end of the sixth fiscal year, you have the option of taking out a loan against your PPF account. The loan term is 36 months. You can borrow up to a maximum of 25% of the amount in your PPF account in the year immediately before the loan applying year. However, the rate of interest is 2% higher than the current interest rate.

Finding an effective tax-saving investment plan can help you save big bucks. Between PPF and ELSS, you can save taxes and grow wealth as per your risk appetite, financial goals, investment horizon, etc.

• In case you are in need of funds during the investment period, the PPF offers a partial withdrawal opportunity as well as the option of taking out a loan.
• After the initial 5-year lock-in period in PPF, you may withdraw 50% of the money or apply for a loan in the third year.
• Even though there is no partial withdrawal for ELSS, the lock-in period is as short as 3 years, after which you can withdraw the full amount.
• On the other hand, if you have a lower risk appetite, a PPF account is a much safer option since they also offer a fixed rate of interest of 7.9%.
• ELSS has the potential for a much higher return depending on the market but is also exposed to much higher market risk.

Finally, before making any financial decision, weigh out your future goals, investment horizon and expectations. This article illustrates the different points comparing ELSS vs. PPF, to help you choose the best option for you. Furthermore, it is advisable to seek assistance from a professional to help you reduce your tax burden and boost your wealth.