ELSS vs PPF: Which Tax-Saving Investment is Right for You?
PPF and ELSS are some of the top choices when considering tax-saving investments. So do you want to invest in both or compare them? Before moving further with the comparison, reflect on your investment objective.
See how much risk you can handle on your investment. Talk to your financial advisor about the same, for a second-person opinion. Once you know your investment horizon, and the amount you are willing to invest, begin with the comparison of PPF vs ELSS.
Let's weigh in on the return rate, investment period, liquidity, etc. to help you find your tax-saving investment.
What is an ELSS Mutual Fund?
Equity Linked Saving Scheme (ELSS) is a type of mutual fund that invests primarily in stocks and equity-linked instruments. ELSS funds offer the potential for high returns due to their exposure to the stock market, but also come with higher risk. They are popular for their tax-saving benefits under Section 80C of the Income Tax Act in India.
What is a Public Provident Fund?
Public Provident Fund (PPF) is a government-backed savings scheme in India that offers guaranteed returns and tax benefits. PPF investments are considered low-risk but have a fixed interest rate and a long lock-in period of 15 years. They are suitable for risk-averse investors seeking secure long-term savings and tax advantages.
Advantages of ELSS & PPF
The following are the benefits that you’ll have when you choose to invest in ELSS, PPF or both.
| Feature | ELSS (Equity Linked Saving Scheme) | PPF (Public Provident Fund) |
|---|---|---|
| Return Potential | Higher | Lower (Guaranteed) |
| Risk | Higher (Market-linked) | Lower (Government-backed) |
| Lock-in Period | 3 years | 15 years (Partial withdrawal after 5 years) |
| Tax Benefits | Tax-free capital gains up to ₹1 lakh per year (Long-term), Taxable at 10% beyond ₹1 lakh | EEE (Exempt-Exempt-Exempt): Investment, Interest, Maturity are tax-free |
| Investment Flexibility | SIP (Systematic Investment Plan) allowed | Fixed investment amount every year |
| Liquidity | Less liquid (Lock-in period) | Very low liquidity (Long lock-in period) |
| Suitability | Investors with high risk tolerance and long-term investment horizon | Risk-averse investors seeking guaranteed returns and tax benefits |
Drawbacks of Investing in ELSS & PPF
Before confirming your investment, do take a look at the possible drawbacks of these two tax-saving investments.
| Feature | ELSS (Equity Linked Saving Scheme) | PPF (Public Provident Fund) |
| Market Volatility | Potential for significant losses in a market downturn | Limited growth potential due to fixed returns |
| Limited Tax Benefit Amount | Tax deduction capped at ₹1.5 lakh under Section 80C | No additional tax benefit beyond Section 80C deduction |
| Early Withdrawal Penalty | Partial withdrawal is not allowed before 3 years | Partial withdrawal with penalty charges after 5 years, very limited flexibility |
| Investment Tracking | Requires active monitoring and research | Limited involvement is required, but interest rates may not keep pace with inflation |
| Suitability for Short-term Goals | Not ideal for goals within 3 years | Long lock-in period may not be suitable for short-term financial needs |
How to Invest in ELSS & PPF?
You can invest in ELSS through INDmoney, and PPF through banks or post offices. Below is the stepwise guide on how to get started.
ELSS Account Opening
To start investing in ELSS mutual funds, register with INDmoney. You just need your Aadhaar-linked mobile number, and you are ready to go. Follow the below steps to start your ELSS investments.
- Open the INDmoney app, and select ELSS funds from the Mutual Fund section.
- Make sure you complete the KYC (Know Your Customer) formalities beforehand for smooth mutual fund transactions.
- Connect with our service provider if you want to find out which ELSS fund to invest in.
- Now, decide on the amount you would like to invest and choose your investment method (lump sum or SIP).
- Complete the unit purchase through a bank transfer or online payment.
- After the expiry of the ELSS lock-in period, choose whether to redeem or continue.
PPF Account Opening
If you are not a risk-taker, don't worry, invest safely and securely with PPF. Open your account in a few easy steps:
- Visit your bank branch
- Ask the bank representative about the PPF account
- Fill in the PPF account form with the relevant details
- Write the total amount you want to deposit each financial year
- An SMS will be sent to your registered mobile with the PPF account details confirming the same.
Conclusion
Tax-saving investments like PPF and ELSS offer unique benefits and cater to different investment goals and risk tolerances. Whether you prioritize the stability and guaranteed returns of PPF or the higher return potential of ELSS, understanding your financial objectives and risk appetite is crucial. Consulting with a financial advisor can provide valuable insights tailored to your financial situation. As you go on this investment journey, know your long-term goals and choose the investment strategy that aligns best with your needs. Investing wisely today can pave the way for a secure and prosperous financial future.
FAQs
Should I invest in ELSS or PPF?
It depends on your risk tolerance and investment horizon. ELSS offers higher potential returns but with higher risk, while PPF is safer with guaranteed returns but lower growth.
Is ELSS more risky than investing in PPF?
Yes, ELSS is riskier than PPF. ELSS is linked to the stock market, so your investment can fluctuate. PPF is government-backed and offers fixed returns.
What are the losses in PPF?
There are minimal losses in PPF. The interest rate is fixed, so you won't lose your principal amount.
Can both ELSS and PPF save tax?
Yes, both ELSS and PPF qualify for tax deductions under Section 80C of the Income Tax Act in India.