PPF or ELSS: What is a Better Option to Save Tax?

PPF or ELSS: What is a Better Option to Save Tax?

Public Provident Fund and Equity Linked Savings Scheme have both grown in popularity over the years so far as tax-savers are concerned. There are many benefits to investing in either scheme, but if you only want to avail one of them, we can help you make an informed choice about where your money will be safer.

Element of risk: The money you put into ELSS will be invested in shares, and since shares are affected by market conditions, they are a considerably risky investment. PPF, of the other hand, invests your money in government bonds. They are comparatively safer as an investment option.

Returns: The investment objectives of both PPF and ELSS are different. While investment in ELSS focuses on maximising returns, investment in PPF provides limited returns (usually no more than what is offered by bank fixed deposits).

Interest rates: PPF interest rates are fixed for each year as per the 10-year government bond yield, much like 5-10 year bank fixed deposits. ELSS interest rates, on the other hand, fluctuate from time to time and to a considerable extent.

Tax benefits: PPF and ELSS are both among the best tax-saving investment instruments out there. Section 80C of the Income Tax Act has made provisions for full tax deduction for both instruments. Both products fall in the EEE (Exempt Exempt Exempt) category and the interest earned is tax-free. Even the maturity amount is tax-free in both cases, but only if the amount invested per financial year does not exceed Rs.1.5 lacs.

Time limit for redemption: There are limitations to all investment instruments that provide tax benefits. Lock-in periods are the main conditions based on which time limits for redemption are determined. PPF and ELSS both lock in the money invested for a predetermined period of time. PPF accounts must be maintained for a minimum of 15 years, the maturity amount can be claimed once 15 years have been completed. However, customers can avail loans against PPF, and even partial withdrawal from PPF is allowed after the completion of five financial years. ELSS offers more flexibility in comparison as the lock-in period associated with it is only three years.

Investment limit: PPF and ELSS both require customers to invest a minimum of Rs.500, but PPF has a maximum limit of Rs.1.5 lacs per annum. ELSS has no such restriction. Even the minimum deposit of Rs.500 must be invested mandatorily into PPF to ensure the operation of the account while there is no such requirement for ELSS.    

Conclusion

Both PPF and ELSS have their pros and cons over one another. While ELSS is a better investment option for certain individuals, PPF works better for others. ELSS is perfect for those who are willing to take significantly large risks, invest money for many years, are far from retirement age, and have a fairly good understanding of the share market. PPF is ideal for those who do not wish to take risk, can invest money in regular intervals of time, seek maximum security, and are closer to retirement.