Home >Money >Personal Finance >PPF, bank FD, ELSS: Here's the best option to save taxes under Section 80C
Which is the best option among PPF, ELSS mutual funds and five-year bank fixed deposit for the first time investor? (Photo: iStock)
Which is the best option among PPF, ELSS mutual funds and five-year bank fixed deposit for the first time investor? (Photo: iStock)

PPF, bank FD, ELSS: Here's the best option to save taxes under Section 80C

PPF is a very good instrument from the point of view of returns, however there is a lock in of 15 years associated with it which makes the liquidity a drag.

I am 24 years old and I have just started working in an IT firm in Bangalore. I want to invest approx. 90,000 this year to save taxes under Section 80C. Which is the best option among PPF, ELSS mutual funds and five-year bank fixed deposit. I do not have any investments till date.

- Anand K

By Raghvendra Nath, MD, Ladderup Wealth Management

Investments made under the above mentioned instruments would qualify for deduction under 80C. Lets analyse the pros and cons of each one by one.

Let’s start with analysing the simplest instrument which is the 5-year bank FD, though it’s the simplest instrument it’s also the most ineffective instrument currently, as the interest rates are low with rates of around 5.25% and there is a lock in of 5 years, to add to that the interest income received would be taxable every year. Hence it is better avoided.

Next we come to public provident fund. A PPF is a long-term investment scheme for individuals who want to earn high but stable returns. As compared to an FD they provide superior returns (current rates at 7.1%. vs 5.25 in FD). PPF investments fall under the EEE head it means that that all deposits made in the PPF are deductible under Section 80C of the Income Tax Act. Furthermore, the accumulated amount and interest is also be exempt from tax at the time of withdrawal. This is a very good instrument from the point of view of returns, however there is a lock in of 15 years associated with it which makes the liquidity a drag.

Finally we come to ELSS, these instruments invest into the equity markets, unlike the above two instruments the structure does not guarantee any fixed payout and is subject to market risk, they also have a lower lock in period of three years as compared to the other alternatives. Given your age I would recommend you to park your funds into the ELSS mutual funds. Firstly because you don’t have investments in equity and secondly because equity is a fantastic instrument for wealth creation in the long term.

Since this is your first investment it is important to note that equity can be very volatile in the short term however over the longer term the volatility reduces substantially.

(Views as expressed by the planner)

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