Category : Investing Guides August 7, 20255 minutes read
To understand the dynamic between ELSS vs PPF it is necessary to note that both the schemes are a tax-saving option under Section 80C of the Income Tax Act, 1961. Equity-Linked Saving Schemes (ELSS) are mutual fund schemes that may potentially serve the dual benefit of tax-saving and wealth creation in the long run. Public Provident Funds are a low-risk, tax-saving scheme, backed by the government of India. There are several pros and cons of PPF and ELSS. While ELSS investments may be suitable for high-risk investors, seeking tax-saving and potential wealth creation in the long-run, PPF may be suitable for investors with a low-risk appetite, seeking to save money and save tax in the long run.
Introduction
ELSS and PPF are two tax-saving instruments. Equity Linked Saving Scheme (ELSS) is a tax-saving MF that also invests in equities. It belongs to a specific class of mutual funds and is eligible for tax deductions under Section 80C of the Income Tax Act, 1961. Put more simply, ELSS offers the advantage of tax-saving along with stock market investment opportunities. It’s a method to take advantage of tax benefits while investing in equity and potentially increasing your wealth in the long run.
To understand the difference between ELSS vs PPF we need to understand what is PPF and how it works. Public Provident Fund (PPF) is a government backed, long-term savings and investment scheme. PPF was created to promote savings and give people financial stability. As a result of its benefits and features that are favourable to investors, PPF has grown in popularity. PPF is a savings plan that is supported by the government and offers investors a high degree of security. Interest rates are established by the government, and returns are guaranteed.
With a 15-year minimum lock-in duration, PPF operates over an extended period of time. This longer term incentivizes people to have a disciplined attitude towards saving and accumulating wealth.
As long-term, tax-saving investments, Public Provident Fund (PPF) and Equity Linked Saving Scheme (ELSS) are similar. Both demand a long-term commitment; ELSS investments promote an extended investment horizon, while PPF has a 15-year lock-in period. Because they both provide Section 80C tax deductions, these options are appealing to people who want to maximise their taxes while gradually accumulating wealth. Despite these parallels, investors should be aware of the different asset classes and risk-return profiles associated when understanding the dynamic between ELSS vs PPF to make sure their decision is in line with their risk tolerance and financial objectives.
To accurately understand ELSS vs PPF and their benefits, it’s vital to understand what ELSS funds are and how they work. ELSS funds set themselves apart by putting a sizable amount of their portfolio into equities, which provides the chance for capital growth. Investors may benefit from the tax saving features of an ELSS fund while gaining the potential benefits of investing in equities. Dividend payouts for consistent income or the growth option for capital growth are the two options available to investors. These are some of the features of ELSS:
Relatively Short Lock-In Period
Among tax-saving devices, ELSS investment stands out as a relatively liquid alternative with a mandated lock-in term of just three years. Comparatively, other tax-saving instruments under Section 80C of the Income Tax Act, 1961 such as PPF, have a longer lock-in period. The relatively shorter lock-in period of ELSS mutual funds may make them suitable for investors with a relatively shorter investment horizon, seeking some liquidity in their investments.
SIP Option
Like most mutual funds, investors can invest in ELSS via Systematic Investment Plans (SIP). With this strategy, investors can potentially benefit from the power of compounding and rupee cost averaging, potentially constructing a profitable and tax-efficient investment portfolio in the long term. SIPs can be automated, and require minimal intervention from the investor. These funds may also be a suitable investment avenue for salaried individuals who wish to make smaller, periodic investments.
Minimum Investment
ELSS is a compelling investment choice because of its low minimum investment requirement, which lets investors start with just ₹500-1000. Minimum investment amount may be suitable for investors who wish to invest small amounts and save tax. This minimum investment ensures that ELSS can be used by all investors.
Tax Benefits
ELSS mutual funds have tax benefits under Section 80C of the Income Tax Act, 1961. Investors can claim deductions up to ₹1,50,000.
High-Risk
Tax-saving MFs such as ELSS are high-risk schemes. As this fund invests predominantly in equities, it may be vulnerable to market fluctuations. Additionally, ELSS schemes may be subject to liquidity risk, concentration risk, settlement risk, etc. However, these funds are a high-risk-return investment and may be suitable for long-term wealth creation.
Understanding the features of ELSS can help us further understand the difference in ELSS vs PPF. The relatively lower lock-in period, potential for wealth creation, and tax benefits may make ELSS a suitable investment avenue for investors.
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ELSS funds serve the dual purpose of long-term tax-saving and wealth creation. Investors can claim deductions up to ₹1,50,000 under Section 80C, of the Income Tax Act, 1961. These are the features of ELSS investments:
- Relatively Short Lock-In Period
- SIP Option
- Minimum Investment
- Tax Benefits
- High-Risk
Public Provident Fund (PPF) scheme is a long-term savings and tax-saving investment plan introduced by the Ministry of Finance in India. PPF is renowned for its suitability for long-term financial objectives, safety, and stable interest rates. These are some of the features and benefits of PPF accounts.
Lock-In Period & Premature Withdrawal
PPF lock-in period is 15 years. Investors make yearly investments for 15 years; the returns from a PPF are not taxable under the Income Tax Act. This is a relatively longer lock-in period and is consequently subject to liquidity risks. PPF accounts offer a secure and long-term savings option with a minimum duration of 15 years. If a person wants to carry on with their investing endeavours, they can prolong their PPF account in increments of five years. However, partial withdrawals are permitted after 5 years. Despite the long lock-in period, returns of PPF are guaranteed. For investors who must meet certain end-use requirements or deal with emergencies, this option offers some flexibility. Following the completion of the fifth year, users are permitted to withdraw up to 50% of the entire amount in a single transaction within each fiscal year.
Minimum Investment Amount
A minimum of ₹500 can be invested in PPF, and the maximum amount a person can invest in a financial year is Rs. 1,50,000. A wide spectrum of investors is served by this flexible investment range. PPF investments can be automated, and thus require minimal intervention from the investor.
Tax Benefits
The tax advantages of the Public Provident Fund (PPF) make it an attractive investment option. Both the PPF investment and the returns are still free from taxation under Section 80C of the Income Tax Act, 1961. With its fixed tenure of 15 years, Public Provident Fund (PPF) emphasises long-term savings.
Low-Risk
Public Provident Fund (PPF) is backed by the government of India, which makes it a low-risk investment. The returns from PPF are fixed and investors may not lose their principal amount. However, this is a low-risk-return investment. Interest rates on PPF are low, and may not be suitable for investors seeking significant returns.
Public Provident Fund (PPF) is a long-term savings and tax-saving investment plan introduced by the Ministry of Finance in India. It may have lower interest rates, however, may help investors meet long-term goals. The features of PPF are:
- Lock-In Period & Premature Withdrawal
- Minimum Investment Amount
- Tax Benefits
- Low-Risk
Now that we understand the features of ELSS vs PPF, let’s explore who may potentially benefit from these 80C tax-saving schemes.
Who Should Invest in Equity-Linked Savings Scheme?
Investors seeking wealth creation with tax saving:
ELSS offers potentially higher returns as it invests 80% of its corpus in equities. Notably, ELSS may frequently produce more appealing post-tax returns than other tax-saving options. Non-Resident Indians (NRIs) can also use ELSS, which makes it possible for a larger pool of investors to benefit from its wealth-building potential and tax advantages.
Investors seeking a long-term investment with minimal liquidity:
ELSS may be attractive to investors who want to gradually increase their wealth because it offers the possibility of higher returns in the future. Moreover, with a 3-year lock-in period, investors with minimal liquidity needs, seeking a medium to long-term investment may be suitable.
Salaried individuals seeking periodic investments via SIP:
If salaried individuals are already making contributions to the fixed-income EPF and are looking for greater returns and tax advantages, then ELSS may be suitable. Salaried individuals can make periodic investments in ELSS, this may potentially be beneficial for tax-saving and wealth creation. Investors may potentially benefit from compounding.
Investors with a higher risk appetite who can invest in equities:
Since ELSS is an equity investment, it is appropriate for investors who can tolerate a higher level of risk. ELSS funds may be subject to market risks, liquidity risks, concentration risks, etc. Investors can better endure short-term market swings by holding onto their investments for a longer time and potentially reducing the impact of market risks.
Who Should Invest in a Public Provident Fund (PPF)?
The Public Provident Fund (PPF) may be a suitable option for investors looking for a safe and tax-efficient long-term savings vehicle.
Investors seeking a long-term, tax-saving investment
For those seeking to combine long-term savings with tax advantages, the Public Provident Fund (PPF) is a suitable investment option. PPF encourages a patient and lengthy investing horizon with its mandated 15-year lock-in period, which makes it suitable for anyone with long-term financial goals like retirement planning or saving for important life events.
Investors with lesser liquidity needs
The Public Provident Fund (PPF) may be a good option for investors who don’t need their money to be liquid right away. PPF is better suited for people with long investment horizons and those who can afford to keep their money invested for a considerable amount of time because it has a mandated lock-in period of 15 years.
Investors seeking premature withdrawal
Although the PPF lock-in period is 15 years, partial withdrawals are allowed. The Public Provident Fund (PPF) provides many alternatives for withdrawal flexibility, depending on various time frames. Investors can choose to withdraw the whole corpus when the account matures in 15 years. After completing five years from the date of account inception, PPF permits a partial withdrawal of up to 50% of the total available amount for those requesting partial liquidity. Additionally, investors have the opportunity to withdraw the full amount in the event of an early closure of the account after five years from the date of inception. These withdrawal clauses give PPF more adaptability by meeting different investors’ needs at different points during the investment term.
Investors seeking a low-risk investment option
For investors looking for a less risky investment option, Public Provident Fund (PPF) might be a suitable option. For those who value capital preservation, PPF is a government-backed savings plan with a fixed interest rate that offers a steady and secure option.
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Who should invest in ELSS funds?
Who should invest in PPF?
- To accurately understand the dynamic between ELSS vs PPF investors need to understand the features and potential benefits of both schemes.
- Equity-Linked Savings Schemes (ELSS) is a mutual fund scheme that allows investors to potentially generate wealth and save tax in the long-run.
- Public Provident Fund (PPF) is a government backed investment scheme that allows investors to save tax and invest money with a minimal level of risk.
- ELSS funds offer the benefit for SIP and have a relatively shorter lock-in period of 3 years. However, they are high-risk investments as at least 80% of their corpus is invested in equities.
- Benefits of PPF accounts include premature withdrawal, low-risk, and tax benefits under Section 80C of the Income Tax Act, 1961.
