What Should You Choose to save tax?

ELSS Vs PPF which Tax saving instrument is Better

 “….. But in this world, nothing can be said certain, except death & taxes.” said by Benjamin   Franklin.

 While we can’t be clever with death, we can be smart with taxes & save our hard-earned   money. One can save tax by investing in various instruments such as Equity linked saving   schemes (ELSS), Public Provident Fund (PPF), National Pension Schemes (NPS), Tax   saving Fixed Deposit etc.

 Out of this tax saving options, ELSS & PPF are most popular. Investment of up to Rs. 1.5   lakhs 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 withdrawal after 7^th years. 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 year. However, it is suggested that you do not redeem it, as by being invested your capital will appreciate over time. 

·      Returns:

The returns are one of the key factors that distinguishes PPF & 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 markets. 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%.

·      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 case of ELSS. While the tax benefit will apply to Rs. 1.5 lakh, you can invest more & earn returns on entire investment amount. As a result, ELSS is also a popular option for long term goals.

·      Taxation:

Gains from ELSS funds are taxed as per equity funds & is subject to long term capital gains. If the units are held for more than one year, gains up to Rs. 1 lakh in a financial year is exempted. If gains are higher than 1 lakh, long term capital gains will be applied in ELSS funds.

On the other hand, PPF falls under EEE (Exempt, Exempt, Exempt) category. This means that the interest earned by investing in PPF & the principal amount is exempted from taxation.

Conclusion:

By now, you have become familiar with the differences between PPF & ELSS. PPF is the most preferred by Indian Masses, but its long-term performance is not attractive while ELSS funds have given attractive returns. Also, with interest rate trending down from 8% to 7.9% (July – September 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 & above the Rs. 1.5 lakh mark & 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, you can start investing in other equity funds to achieve your financial goals.