Public Provident Fund (PPF) and Equity-linked Saving Schemes (ELSS) are tax saving instruments, which qualify for a deduction of up to ₹1.5 lakh under Section 80C. As the financial year nears an end, you might be exploring various options including PPF and ELSS. Various products under Section 80C have different characteristics in terms of their return, risk-return profile, lock-in and taxability of gains and accumulations, and others. Therefore, one should analyse all these factors while choosing the tax saving product.
Let us understand how PPF and ELSS differ and if they can be alternatively used as a tax saving product?
Taxation: PPF is one of the most popular small savings instruments. It's a debt product, which provides a guaranteed return and falls under the exempt-exempt and exempt (EEE) tax regime. A EEE regime means that investments made up to ₹1.5 lakh in PPF in a financial year are exempt from tax, the interest earned which gets accumulated as well as the entire accumulation including (principal as well as interest) are also tax free at the time of withdrawal.
ELSS is a mutual fund, which invests in equities and related instruments. In case of ELSS, investments up to ₹1.5 lakh are tax free. Capital gains of more than one lakh in case of ELSS are taxed at the rate of 10%.
Lock-in: PPF has a lock-in of 15 years while ELSS has a lock-in of 3 years, lowest among all the tax saving instruments under Section 80C. In case of PPF, partial withdrawal is allowed from the end of seventh financial year. While premature closure of the account is possible from fifth year under certain conditions.
Returns: PPF is a government-backed guaranteed small savings scheme on which the interest rate is revised quarterly depending on the yield of the government securities of similar maturity. Currently, it is offering an interest of 7.9% for the quarter ending March 2019. Gain from ELSS is a market-linked equity product where the returns will depend on the performance of the overall equity market and the underlying stocks in which the fund manager has invested.
Mode of investment: It is very convenient to invest in both PPF and ELSS. In case of ELSS, one can invest in lumpsum as well as through systematic investment plans (SIPs). Similarly, one can invest lumpsum as well invest in maximum 12 installments in a financial year in PPF.
PPF or ELSS, which one to choose?
PPF and ELSS are not comparable as they are different asset classes. “It usually isn't right to compare these products as they are not comparing apples to apples but since these are both eligible under Section 80C they do get compared when a person is taking decisions," said Shweta Jain, chief executive officer and founder, Investography.
PPF is a debt-oriented product while ELSS is an equity product, which is relatively more volatile. One should choose between the two depending on their overall asset allocation.
“Whether to choose PPF or ELSS will depend upon the risk profile of the investor. One should look at the current and target asset allocation and decide what will help to bridge the gap or maintain the required target levels of different asset classes," said Rohoit Shah, founder and chief executive officer, GettingYouRich.com.
“PPF is an excellent option for risk-averse investors with a high yield on a post-tax basis. A conservative investor who is comfortable with the 15-year lock-in may consider PPF. While ELSS is good if one is comfortable with the volatility of the equities as it has the potential to deliver inflation beating returns over long-term," he added.
Tax saving investments should be part of your overall financial goal. Thus, they should be planned at the start of the year and investments should be made through the year to avoid last-minute decisions.