ELSS vs PPF: Which Tax Saving Instrument Is Better
“...but in this world nothing can be said to be
certain, except death and taxes.”
Benjamin Franklin
While we can’t get clever with death, we can be
smart with taxes and save our hard earned money. One can save tax by investing
in various instruments such as Equity Linked Savings Scheme (ELSS), Public
Provident Fund(PPF) and National Pension System(NPS) and tax saving fixed
deposit etc.
Out of these tax saving options, ELSS and PPF are
the most popular. Investment of up to Rs.1.5 lakh in a financial year in these
two options among others qualify for tax deductions under Section 80C of Income
Tax Act 1961.
Have you invested in PPF or ELSS? In this article,
we will compare these two tax saving instruments which will help you to figure
out the right one for you.
Lock-in Period:Both ELSS and PPF
come with a lock-in period. ELSS funds have a lock-in period of three years
while PPF comes with a 15-year lock-in period. However, in PPF, you can make
partial withdrawals after the seventh year. Hence, we see that ELSS has a
shorter lock-in period than PPF. This means that you can redeem the ELSS fund’s
units after three years. However, it is suggested that you do not redeem it, as
by being invested your capital will appreciate over time.
Returns:The returns is one
of the key factors that distinguishes PPF and ELSS. The government of India
fixes the interest rate of PPF every quarter. On the other hand, the returns in
ELSS is not assured and is linked to the equity market. If we see the
historical performance of both the two options, ELSS funds, in the last ten
years has given returns of 13.55%* while the interest rates in PPF has ranged
from 7.6% to 8.8%.
According to research by
Value Research, an investment of Rs.1.5 lakh every year over the last 20 years,
have grown to Rs.79.39 lakh in PPF. While in the same time frame, investment in
ELSS has increased to 2.28 crore. Hence, in terms of returns, ELSS has
outperformed PPF.
Investment amount:In
case of PPF, you can only invest up to Rs.1.5 lakh in a financial year.
However, there is no such restriction in the case of ELSS. While the tax
benefit will apply to Rs.1.5 lakh, you can invest more and earn returns on the
entire investment amount. As a result, ELSS is also a popular option to plan
for long term goals.
Taxation: Gains fromELSS
funds are taxed as per the equity funds and is subject to short term and long
term capital gains. Short term capital gains are applicable if the units are
sold before the 1st year.
In this scenario, a tax of 15% will be applicable. If the units are held for
more than a year, gains up to Rs.1 lakh in a financial year is exempted. If the
gains are higher than Rs.10 lakh, long term capital gains will be applied in
ELSS funds.
On the other hand, PPF falls under the EEE(Exempt,
Exempt, Exempt) category. This means that the interest earned by investing in
PPF and the principal amount is exempted from taxation.
Conclusion
By now, you may have become familiar with the differences
between PPF and ELSS. PPF is the darling of Indian masses, but its long term
performance is not attractive while ELSS funds have given attractive returns.
Also, with the interest rate trending down from 8% to 7.9% (July-Sep 2019), it
is unlikely that PPF will give a better return.
ELSS is not only a tax saving instrument; it can
also help you to achieve your long term financial goals such as retirement. It
is because you can invest over and above the Rs.1.5 lakh mark and still earn
returns on the entire corpus.
If you have just started working or have no
exposure in the equity market, you can invest in ELSS funds. Once you are
comfortable with ELSS funds, you can start investing in other equity funds to
achieve your financial goals.
In case of any queries, please get in touch with a
financial advisor. He or she will be able to help you out with the best ELSS
funds.
*Data as on 10th July,
2019
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