EPF vs ELSS vs PPF: Which can give highest return on Rs 1.50 lakh/year investment for 20 years? Know here
EPF vs ELSS vs PPF: Investments in Employees' Provident Fund (EPF), Public Provident Fund (PPF), and Equity Linked Savings Scheme (ELSS) mutual funds provide tax benefits on deposits under Section 80C of the Income Tax Act, 1961.
EPF vs ELSS vs PPF: Employees' Provident Fund (EPF) and Public Provident Fund (PPF) are retirement-specific schemes, while Equity Linked Savings Scheme (ELSS) is a mutual fund category. They are different in nature but have a common trait. Deposits of up to Rs 1.50 lakh in a financial year in either of them provide tax benefits under Section 80C of the Income Tax Act, 1961. A lot of mutual fund investors use ELSS to save tax, but such funds are large cap stock-heavy and can provide stability and growth to investors in the long term. They can also be used to create a retirement corpus.
Photos: Unsplash/Pixabay
(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)
What is EPF?
In EPF, the employee and the employer contribute to the EPF account of the employee. The employee gets 8.25 per cent interest rate on this contribution. They can contribute till the account holder reaches 60 years of age. At 58 years of age, the account holder can withdraw the entire corpus. They can also withdraw it on completion of 10 years of service, or under some other circumstances.
Minimum basic pay for EPF
EPF is calculated on the basis of the employee's monthly basic pay and dearness allowance (DA). One must have a basic pay of at least Rs 15,000 a month to be eligible to open an EPF account.
EPF: Minimum and maximum contributions
The minimum EPF contribution in a month is Rs 1,800, while the maximum is 12 per cent of the basic pay and DA. The interest earned and the corpus created are also tax-free.
Minimum and maximum contributions in PPF
One can open a PPF account in a post office or a bank and can make voluntary contributions. The minimum investment in a financial year is Rs 500, and the maximum is Rs 1.50 lakh. Investments can be made one time, in phases, or on a monthly basis.
PPF lock-in period
The current interest rate is 7.1 per cent. The guaranteed return scheme comes with a lock-in period of 15 years. The account holder can withdraw corpus before that under certain circumstances.
PPF account extension rules
On completion of 15 years, one can extend the account for further blocks of 5 years. They can continue with or without contribution. In either case, they will get interest on their corpus. The interest earned and the retirement corpus amount are tax-free.
ELSS lock-in period
This is the only category of mutual funds that provides Section 80C tax benefits. Among all schemes providing 80C benefits, ELSS holds the shortest lock-in period of 3 years.
Sebi classification of ELSS funds
As per Securities Exchange Board of India's categorisation of mutual funds, ELSS funds need to have at least 80 per cent of their investments in stocks in accordance with Equity Linked Saving Scheme, 2005, notified by Ministry of Finance.
How ELSS funds are taxed
ELSS funds are large cap stock-heavy, so they can provide stability along with growth in the long term. ELSS are equity funds, taxed at 12.50 per cent for long term capital gains and at 20 per cent for short term capital gains.
EPF corpus from Rs 1.50 lakh investment in 20 years
Since contribution in EPF is monthly, we will calculate the corpus at Rs 12,500 deposit a month (Rs 1.50 lakh in a year) for 20 years.
In 20 years, the total contribution will be Rs 30 lakh, estimated interest will be Rs 46,39,604.07, and the estimated corpus will be Rs 76,39,604.07.
PPF corpus from Rs 1.50 lakh investment in 20 years
The estimated interest in 20 years will be Rs 36,58,288, and the estimated PPF corpus will be Rs 66,58,288.
ELSS corpus from Rs 1.50 lakh investment in 20 years
We are calculating here at 12 per cent annualised return.
Estimated capital gains in 20 years will be Rs 94,89,349, and the estimated corpus will be Rs 1,24,89,349.