Save more in 2019! PPF vs ELSS: Which investment option is better?

There are number of investment options available in the market but an investment should not only give better returns, it should save tax. Puiblic Provident Fund (PPF) and Equity-Linked Savings Scheme (ELSS) are two popular schemes that give handsome returns and save taxes. A contribution of up to Rs 1.5 lakh a year under these products qualify for tax deduction under Section 80C. Financial planners believe that the investors should look at returns as well as tax saving while putting their money in these products. 

Pankaj Mathpal, MD, Optima Money Manager, told Zee Business TV, "An investor should set up his\her financial goals before investing, however both PPF and ELSS are better options for long term investments.''

-PPF (Public Provident Fund)

PPF is a 15-year government-backed savings option offered through banks and post offices. Once the lock-in period is over, it can extended further in batches of five years. The interest rate on the PPF is revised every quarter and is bench-marked to yields on government securities. Currently, the PPF fetches an interest rate of 8%. Investments in PPF are also exempted under section 80-C of Income Tax Act 1961. The PPF account can be opened in any bank or post office. 

-ELSS mutual funds 

ELSS invest in equity shares of companies across sectors and market capitalization and have a three-year lock-in. It is quite the same as a diversified equity fund, other than tax deduction benefits and the three-year lock-in. ELSS investments come with a lock-in period of three years, which is lowest among Section 80-C investments. However, Investments in ELSS are driven on the basis of stock markets. 

ELSS funds come with both growth and dividend options. Mutual fund houses have to pay a dividend distribution tax or DDT of 10% on dividends declared under equity schemes, including ELSS funds. This effectively reduces the return from dividends from equity funds.

''There is no doubt that ELSS is a risky way to go but it has given much better numbers against PPF for quite a some time now,'' Mathpal  mentioned.

What is the risk involved?

Being backed by the Government of India, PPF investments are very safe. However, ELSS- being an equity fund, the investments are subject to market risks.

What returns to expect? The Government declares the rate of interest for PPF investments every year. It is usually between 7.5% p.a and 8.5% p.a. decided by RBI. Though, ELSS being market-linked, the returns can vary depending on the scheme selected but an investor can expect an approximate return of 12-14%.

What are the tax benefits?

The invested amount in PPF is exempted from taxes at the time of investment, accumulation, and withdrawal. However, in case of a ELSS, there is a 10% LTCG tax applicable on the profit of over and above 1 lakh.

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Is there any lock-in period?

In PPF, the investments are locked in for a period of 15 years. (After the 5th year partial withdrawals are permitted). In ELSS, the investments have a lock-in period of 3 years with no possibility of premature withdrawal.

"If an investor is comparing ELSS to PPF, he should remain invested in ELSS for 15 years before calculating the actual results as PPF has a lock in for 15 years,'' explained Mathpal.

Is there a maximum time limit for investment?

The PPF investments cannot be made for more than 15 years. But ELSS investments have no upper time limits.

How much can I invest?

You can invest anything between Rs 500 and Rs 150,000 in PPF in a financial year, either in lumpsum or in 12 installments. In ELSS, you can invest as much as you want. However, under Section 80C of the Income Tax Act, only Rs 150,000 in a financial year will be allowed for a tax deduction.