ELSS versus PPF

Public Provident Fund (PPF) is one of the popular traditional 80C tax savings options in India. There are several reasons for PPF’s popularity among tax payers. The average retail investor is usually risk averse and capital safety is assured by the Government in PPF. Historically, PPF interest rates have been few basis points higher than the prevailing bank fixed deposit rates and PPF maturity proceeds are entirely tax free.

Mutual Fund Equity Linked Savings Scheme (ELSS) has been growing in popularity as tax savings investments among retail investors over the last several years. Investment in ELSS like PPF, qualify for tax deduction under Section 80C of Income Tax 1961. However, unlike PPF, ELSS is market linked and subject to market risks. ELSS funds have a lock-in period of 3 years, which is one the lowest in category of options under section 80C (PPF has a 15 year tenure with partial withdrawal after 7 years). ELSS funds are essentially diversified equity mutual fund schemes which invest in equity and equity related securities across sectors and market capitalization segments. An investor can invest in ELSS either in lump sum or through Systematic Investment Plans (SIP). Though ELSS funds are subject to market risks, historical data shows that equity has been best performing asset class over long investment horizon.

Performance comparison of PPF and ELSS over different investment tenures PPF pays interest on accumulated deposits and accrued interest. PPF interest rates are linked to Government bond yields and may be revised on quarterly basis. The current PPF interest rate is 7.9% (source: Economic Times). ELSS returns are dependent on the performance of the underlying portfolio of stocks. Returns depend on market performance and the fund manager’s stock selection. The table below shows the returns Rs 5,000 monthly investment in PPF and Nifty 50 TRI over different investment tenures e.g. 3 years, 5 years, 7 years, 10 years etc. (period ending 31st March 2019). Nifty 50 TRI is the total returns index of the 50 largest stocks by market capitalization. We are using Nifty 50 to show indicative equity market returns.

TenureCumulative Investment
(INR)
Corpus Accumulated in
PPF (INR)
Corpus Accumulated in
Nifty 50 TRI (INR)
3 years180,000203,242222,819
5 years300,000369,775408,383
7 years420,000567,893672,634
10 years600,000935,6151,134,446
15 years900,000T1,782,9792,569,091

Source: Advisorkhoj Mutual Fund Research, Dated 31st October 2019

You can see that Nifty gave higher returns than PPF across various tenures. Over long tenures 7 years or longer, Nifty gave much higher returns over PPF and helped investors accumulate much more wealth. It is pertinent to note that fund managers are tasked with beating the market and ELSS is one of the ideal tax saving investment option which may help in long term wealth creation for investors with moderately high to high risk appetites.

Tax treatment of PPF versus ELSS

PPF is the most tax friendly 80C investment option since its maturity proceeds are entirely tax free. After PPF, ELSS is one of the most tax friendly 80C investment options.ELSS capital gains of up to Rs 1 lakh in a financial year are tax free. Capital gains in excess of Rs 1 lakh are taxed at 10%. Investors can maximize their tax benefits by harvesting tax exempt capital gains (of up to Rs 1 lakh) every year after the lock-in period and re-investing in ELSS to get tax savings under Section 80C.

Liquidity of PPF versus ELSS

Liquidity is an important consideration for many investors. Tax savings does not imply that you keep your money locked in for long periods of time. The minimum tenure of PPF is 15 years, extendable in blocks of 5 years. Withdrawals not exceeding 50% of 4th year balance are permitted after a lock-in period of 7 years. PPF also offers loan facilities in specific circumstances. ELSS mutual funds, on the other hand, are the most liquid investments u/s 80C. You can redeem your ELSS units partially or fully after the lock in period of three years is complete. However it needs to be mentioned here that, you do not necessarily have to redeem your ELSS units after the expiry of the lock-in period. You should redeem according to your financial needs and invest in ELSS as per your financial goals.

Summary

In this article, we compared and contrasted ELSS versus PPF on several parameters. Both PPF and ELSS are very tax friendly investments. Though ELSS investments are subject to market risks, they offer superior wealth creation potential and more liquidity compared to PPF. Investors should consult with their financial advisors whether ELSS is suitable for their tax planning purposes.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

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