ELSS vs PPF: 7 critical decision-making features PLUS a bonus tip

I have spoken in the past about why all of us should take maximum tax rebates by investing in appropriate tax-saving products. Money saved is money earned and, in this case, it is not just the money which is invested for tax benefits, but also money saved by way of reduced income taxes. I am also a strong proponent of the old tax regime. In case, you have missed out on my blog on the old tax regime versus the new tax regime, then you could read it here. This blog is not an ELSS vs PPF debate. Rather, it provides you features of two of the most popular products and then lets you decide what is suitable for your needs.

ELSS vs PPF

Amongst the 80C products, I have a few favourites. Employee Provident Fund (if you are an employee), Public Provident Fund (PPF), Equity Linked Saving Schemes (ELSS), Term insurance premium, Sukanya Samriddhi Scheme for the girl child, principal payments for housing loan and education tuition fees. In this blog, I would be providing the features of ELSS and PPF. As per the current taxation rules, we can invest up to a sum of Rs 1.5 lakhs per year under Section 80C, in one product or a combination of any of the eligible products.

Why so much noise about ELSS vs PPF? Let’s understand the features

 1. What are PPF & ELSS?

Public Provident Fund (PPF) is a Government of India scheme. Since it is guaranteed by the Government of India, there is no default risk but has a risk of another kind which I will mention later. It is very popular amongst investors for its safety and assured returns.

Equity Linked Saving Scheme (ELSS) is an equity mutual fund that invests mainly in company stocks, thus having the potential of delivering higher returns but also carry risk volatility, without guaranteed returns.

 2. Which product provides higher returns?

The returns in PPF are guaranteed, but they do not get locked at the interest rate when they are invested. The interest rates are reset every quarter as notified by Government and therefore in a falling interest rate scenario, your entire accumulated corpus would be subject to that rate. Of course, it can also benefit the investor when there is an increase in interest rates. Currently, the interest rate is around 7.5% to 8%. On a side note, when I had started investing in PPF about 25 years ago, that time it was more than 12% p.a.

ELSS is linked to the markets and therefore returns are not fixed. In short term, they could even go negative if the market conditions are not conducive. The returns are dependent on stock markets and on the fund performance, the stocks in which the fund manager has invested.

 3. Need a product with the shortest lock-in period?

If this is your need, then there is no comparison to ELSS against any other products under Section 80C. ELSS has a lock-in of only three years. Do note every investment has 3 years of lock-in and not just when you started investing. So, if you are investing through a Systematic Investment Plan (SIP), then each SIP would be locked for 3 years. 

PPF, on the other hand, is locked for 15 years. Though loans are possible from the fourth year of investment and partial withdrawal from the 7th year, subject to some rules. Your PPF investments are locked in for 15 years, but some partial money can be withdrawn after 7 years. You can also extend a PPF indefinitely for every block of 5 years, with or without any fresh contribution.

 4. Is there a risk in investment?

As mentioned previously, PPF is guaranteed by Government and therefore has the highest sovereign guarantee, there is no default risk. But one risk which could happen is that the product may not give inflation-adjusted returns and so the time value of money invested could go down. This according to me is the biggest risk in PPF.

ELSS is volatile and therefore risky. The value would change depending on the market and the value of the securities in which the fund manager has invested. The market as a whole (Sensex or Nifty) may be doing well, but it is possible that the fund manager may not be invested in those stocks in that proportion. If his stocks aren’t doing good, then the value of the ELSS would go down that day. In the short term, there can be downturns expected, but over a long period, generally, equity-related investments are expected to beat inflation handsomely. Volatility should not be the reason why investors need to stay away from ELSS.

5. What about taxation? How are the returns post-tax?

PPF is tax-free and when the money is withdrawn after the lock-in period there is no tax which gets deducted.

ELSS is taxable since the 2017-18 budget. Any capital gains (not the redemption amount but the total long-term capital gains) in a financial year are tax exempt up to Rs 1 lakh. Beyond this thresh hold, the capitals gains are taxed at 10%. This is the regulation as on date, and can always change in future.

 

 6. How to invest in PPF & ELSS?

It can be opened at Post Office, State Bank of India and a few other nationalized banks and even at private sector banks such as ICICI and HDFC.

ELSS funds are available with most fund houses in India. They can be purchased offline by visiting any of the Asset Management Company (AMC) offices or by talking to any mutual fund distributor. You can also purchase them online either directly yourself through the website or by contacting a mutual fund distributor or an Independent Financial Advisor. If purchasing them yourself, please do a thorough analysis while selecting the most suitable product for your risk profile. As mentioned previously, that while PPF is the same whether you but at Post Office or a bank, it is not the same with ELSS. The mutual funds of various AMCs are different depending on the objectives, as set by their respective fund houses. You do need to be Know Your Customer (KYC) compliant before you can invest in a mutual fund.

 7. Are all ELSS products the same?

Not at all! ELSS funds are Diversified Equity Mutual funds. Depending on the fund objectives, the ELSS can be classified as aggressive (whose which invest more in mid-cap and small-cap funds), thus higher risk and a potential for higher returns, or they could be conservative and balanced by investing more in the large-cap companies.

There are also other factors that should be looked at like the track record of the fund house, fund manager’s track record, how long the fund has been in operations, various ratios like alpha, beta, sharpe ratio, etc. Research has to be similar as you would do for investing in any mutual fund type. I have written a blog on what to look for while investing in mutual funds. If you find it overwhelming, then you may want to take professional help in getting a suitable product based on suitability.

  8.  Here is a bonus tip – Taking tax benefits without saving

Yes, you can invest in an ELSS for 3 years, and then reinvest the same money in the fourth year and still claim tax rebates for that year (without any fresh investment). So, technically, you just need to invest in ELSS for the first 3 years and then keep rolling the same money and continue to claim tax rebates (assuming none of the withdrawals go lower than the originally invested amount). Please do note that while this is an option, I do not recommend as I believe equity investment is good for long term wealth creation. So, if the ELSS funds in which you have invested are good, then you can let the money remain there after three years of completion and let the money grow.

So, what’s the verdict?

Everyone can invest in both products. I would say PPF is suitable for those who are conservative and can never see the value of their investment amount going down. Please do note that once an investment is started, you have to deposit at least Rs 50 per year, else your account would go dormant and can only be revived after paying a penalty. Also, if you ever get involved in a legal dispute, courts cannot attach the money in your PPF account.

ELSS has its advantages and with that incremental risk, you have a product that has the potential to beat inflation comfortably and help you in wealth creation. So, happy choosing a product based on your comfort. If you decide to invest in ELSS, then do not wait till then the last moment when the accounts department or the HR department in your company asks for the proofs. Then you would be buying the funds in lump sum, which may not work in your favour if the markets are at a high. Instead, you may want to plan it at the beginning of the financial year and then invest through a SIP. Here is another blog on ELSS advantages which was published in the past.

Happy investing! Eventually, we should invest in products which get us good sleep in the night. Else, they may not be worth it. If you would like to read any of my previous blogs, then please visit my website. You can also subscribe to my youtube channel. For any investments, please feel free to contact us.

ELSS or PPF? Tax rebates without investing?

FeaturesPPFELSS
Product riskGovernment of India guaranteedEquity market linked
ReturnsPrincipal guaranteed, interest rate reset every quarterVariable, market linked, potential to beat inflation
Lock-in

15 years

Every investment: 3 years

Taxation

Tax free on maturity

Equity capital gains taxation

Purchase researchProduct same at all points of sale

Every ELSS fund is different, needs a thorough research

 

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