Before comparing both ELSS and PPF investment options, let us first know what is Equity-linked savings scheme (ELSS) and Public Provident Fund (PPF).
Equity-linked savings scheme or ELSS is a type of mutual fund which invests money accumulated in equities and equity-linked instruments and offers tax deduction under section 80C of the Income tax Act, 1961.
Public provident fund or PPF is an investment option backed by the government of India. The PPF scheme is available to all the citizens of India except NRIs.
In this article we will compare both investment options to find out which tax saving investment option is better, ELSS or PPF.
Risk
Public provident fund (PPF) is considered as the safest investment option as it’s managed by the government of India. Interest and principal component of your investment in PPF comes with sovereign-backed guarantee.
ELSS funds are managed by fund managers who invest your money into equity. As the entire amount invested in equity, they are prone to the inherent volatility of the equity market. Money invested in ELSS funds doesn’t get a sovereign-backed guarantee.
Return
Interest rate of PPF is decided by the Government of India. Currently the public provident fund pays 7.1% per year on its investments, compounded annually. Interest and maturity proceeds from the Public Provident Fund are completely free. Due to which post tax return is higher in comparison to other investment options.
Return from Equity-linked savings schemes is decided based on equity market performance and the portfolio of the fund. In the long term, ELSS returns can be much higher in comparison to the return from PPF.
Tax deduction
Investment in both PPF and ELSS qualify for tax deduction under section 80C. You can take tax benefits for investing into these funds up to the maximum limit of Rs. 1, 50,000 as prescribed under section 80C.
Interest and maturity proceedings from PFF are completely tax exempted. However, in the case of the ELSS scheme, long term capital gains tax applicable at the rate of 10%.
Due to the higher return of the ELSS scheme, the post-tax rate comparison can give an edge to ELSS vs PPF.
Liquidity
PPF comes with a lock-in period of 15 years. Partial withdrawal is allowed but most of your money invested will be blocked for a long period of time. Premature closure is allowed in certain specific cases such as life-threatening diseases of the account holder, spouse, dependent children or parents or for funding higher education of the account holder or any dependent children and in case of change in residential status.
ELSS has a lock-in period of 3 years.
Minimum investment
PPF scheme requires the account holder to invest a minimum amount of Rs 500 per year. In case of failure, the account holder is required to pay Rs 50 per year.
However, ELSS has no minimum investment requirements. You can start investing a small amount every month.
Quick comparison of PPF and ELSS
| Particulars | Public Provident Fund (PPF) | Equity Linked Saving Scheme (ELSS) |
| Risk | Risk Free as it is backed by the Government of India. | Investments are subject to market risk as funds are invested in equity or equity linked securities. |
| Rate of return | 7% to 8% per year(Government declares the rate of interest) | 12% to 16% per year(Market linked rate of return, depends on market volatility) |
| Tax benefits | At the time of investment, you get tax deduction under section 80C. Interest and withdrawal are also tax exempted. | You get section 80C tax deduction for your investment. However, 10% capital gain tax is applicable if your return is over and above Rs 1,00,000 per year. |
| Lock-in Period | 15 Years | 3 Years |
| Investment time limit | Not allowed to invest for more than 15 years. However, you can extend it to 5 more years. | ELSS has no upper time limit. |
| Minimum and maximum limit of investment | Minimum amount to be invested is Rs. 500 per year up to a maximum limit of Rs. 1,50,000 per year. You can invest either in lump sum or in 12 installments. | No minimum or maximum limit. However, you cannot get more than Rs. 1,50,000 deduction per year. |
Table showing comparison of tax saving investment options : –
| Investment option | Return per year | Lock-in period | Tax on return | 80C Eligibility |
| Fixed deposit | 4% to 6.5% | 5 Yrs | Yes | Yes |
| PPF | 7% to 8% | 15 Yrs | No | Yes |
| NSC | 7% to 8% | 5 Yrs | Yes | Yes |
| ELSS | 13% to 16% | 3 Yrs | Partially taxable | Yes |
| NPS | 8% to 10% | Till retirement | Partially taxable | Yes |
Now comes the most important question “Which tax saving investment option is better, ELSS or PPF?”
Which one is better, ELSS or PPF?
To be very honest, the answer is both are better investment options and good for tax saving. It depends on your risk appetite and financial goals that you want to achieve.
If you want to save money for a long-term financial goal, the Public Provident Fund can be a safe bet as PPF comes with sovereign-backed guarantees.
You may get stuck in the share market volatility at the right time of requirement, due to which you may be required to wait for some more time instead of withdrawing your investments during a market downturn.
If you are a risk taker, then better to go for Equity-linked savings scheme or ELSS as it offers higher post tax return, liquidity and ease of investment to investors.
In case of ELSS you need to compare past performance of the fund and management to know exactly which suits best to your requirement. ELSS is the only kind of mutual fund eligible for tax benefits U/s 80C.
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