Introduction
Investment isn’t easy. You are subject to the whims of the ever-changing market, and you may lose all your hard-earned money due to a single tweet from a prominent CEO. Of course, there are certain options, such as Mutual Funds, that mitigate much of the risk of just offering your money to the fickle god that the stock market is and simply hoping you are blessed with returns. But what if there was a way to make secure investments as well as save on taxes? Well, there is good news for you, dear Investor. There are not one but two such ways to save on taxes as well as make a low-risk investment: Equity Linked Savings Schemes (ELSS), Mutual Funds, and Public Provident Fund (PPF) bank accounts.
ELSS vs. PPF
ELSS and PPF are both very good long-term, low-risk, tax-exempt investments that are also accessible to the everyday person. Naturally, the question of which to invest in arises. To answer which, we must first take an in-depth look at both of these schemes.
Difference Between ELSS and PPF in Tabular Form
| Parameters | ELSS | PPF |
| What it is | Equity Linked Saving Scheme (ELSS) is a type of mutual fund that offers a tax rebate under Section 80c of the Income Tax Act, 1961. | Public Provident Fund (PPF) is a long-term investment scheme wherein one opens an account under this scheme and gets back interest for it, which is not taxable under income tax. |
| Lock-in Period | 3 Years | Min. 15 years |
| Interest rate | 12% to 15% on avg. | 7.10% |
| Investment Limits | No Limits | Min: Rs. 500 Max: Rs. 1.5 lakh |
| Tax Rebate | Up to Rs. 1.5 Lakh | Fully Tax Exempt |
| Offered/Managed By | Corporations, Fund Managers | Government of India |
What is ELSS?
Equity Linked Saving Scheme is a type of diversified equity scheme (or Mutual Fund) that is partially tax-exempt in India under Section 80c. The oldest ELSS on the market is the SBI Long Term Equity Fund, started in 1993. ELSSes are a splendid investment option for a lot of the same reasons mutual funds are. For one, ELSSes are one of the exceedingly rare types of investments that are relatively low-risk but still have the potential to provide higher returns than inflation would reduce, thus making a profit in real terms. For example, suppose that one puts their money in a fixed deposit and gets back 6% interest on that money at the end of the year. If the inflation that year is 11%, one is not actually making money. Mutual Funds, and by extension ELSSes, have the potential for returns higher than the inflation rate.
They are also akin to mutual funds in the sense that they are managed and invested by a professional fund manager, so the investor does not have to worry about what companies to invest in at what time. Mutual funds are an excellent choice for investors looking to create long-term wealth, and, of course, the same goes for ELSSes.
Where an ELSS differs from a traditional mutual fund, however, is that it is only for equity, while mutual funds may also be for debt. ELSSes also have a relatively short lock-in period of 3 years, leading to more liquidity for the investor. Investors can buy ELSSes through Systematic Investment Plan (SIP) options as well as lump sums. However, investors should note that the lock-in period starts with the purchase of units. So, for example, if one purchases 1000 units on 27 July 2023, the lock-in period for his investment will end on 23 July 2026. But, if one is using a SIP, buying 10 units a month starting July 2023, the lock-in period for the first 10 units will end in July 2026, and in August 2026 for the next 10, and in September 2026 for the 10 after that, and so on. There is also no upper limit on how much an investor can invest in an ELSS. Of course, the greatest benefit of ELSSes is that one can deduct Rs. 1.5 lakh per year from their taxes on the returns from investing in ELSS under Section 80c. This makes it an excellent option for those looking to invest in growing their wealth, as well as looking to keep as much of their savings as possible.
Of course, even though ELSSes are relatively safe investments, that does not mean they are risk-free. Especially compared to schemes like PPF, ELSS are still very subject to market risks, and any investor intending to invest in such a scheme must choose wisely about which ELSS to invest in.
Also, only ELSS offers the potential for inflation-beating returns out of all the tax-exempt investment options available in India. There are multiple types of ELSSes one can invest in.
Types of ELSS
Growth Option
Under this option, the investor only profits when he redeems his investment (sells the equity he bought as part of the ELSS). This is the type of ELSS most subject to market risks, as there are no guaranteed returns.
Dividend Option
In the Dividend option, the investor gets timely dividends when there are excessive profits. However, according to budget 2020, these dividends are taxable in the hands of investors.
Dividend Reinvestment Option
Here, the investor may choose to reinvest his Dividends into the same scheme. This is an excellent option for investors looking to make long-term profits.
What is PPF?
The Public Provident Fund (PPF) is a tax-saving long-term investment scheme in India. This initiative was originally started by the National Savings Institute under the Ministry of Finance in 1968. It aimed to provide a safe investment with reasonable returns as well as tax benefits to create value on the small savings of Indians.
PPF is a way for people to save on taxes while also getting guaranteed returns. It is a very safe investment as it is offered by the Central Government, and it is the perfect option for those who are uncomfortable with taking risks with their money. To get returns from this scheme, one has to open a PPF account, which can have a minimum balance of Rs. 100, with a minimum investment of Rs. 500. per year. This account has a tenure of 15 years, after which one can extend it in blocks of 5 years if the account holder so chooses. The holder cannot withdraw from the account until it reaches the end of its tenure or until the 7th financial year under special circumstances. Naturally, since PPF is a stable investment, it does not have the potential for inflation-beating or even high returns. The PPF account cannot be held jointly, but one can nominate someone for said account. It can also be opened in the name of a minor. You can only invest Rs. 1.5 lakh per year at a maximum into this scheme. Any returns from this account are completely tax-free under Section 80c.
PPF accounts are very often used as retirement funds due to their long tenure and stable return rate. One must be an Indian citizen to open an account, and NRIs are also ineligible to open a PPF account. The current interest rate for PPF accounts is 7.1%, as it has been for the past 3 financial years. One can only withdraw from this account after the 7th financial year onwards, and the interest earned is compounded annually.
On maturity, account holders have a set of options:
- Close the account- The account holder simply withdraws the entire amount in the account and closes the account
- Extend the tenure without contribution- The holder can choose not to reinvest in the account and can withdraw any amount of money once per year, and the amount of money remaining in the account keeps collecting interest. This is the default option and will be chosen if the holder does not take any action within a year of maturity.
- Extend the tenure with contribution- The holder contributes some money, and the tenure is extended. Under this option, only 60% of the maximum amount can be withdrawn.
How you can open a PPF account
A PPF account can be opened either online in a Post Office or in any nationalized bank, for example, Punjab National Bank, or even some select private banks like ICICI, HDFC, and Axis. You will be required to submit certain documents, including:
- Account opening form (duly filled)
- KYC documents, such as Aadhar Card, Voter ID, Driving License, etc.
- Address Proof
- Nominee Declaration Form
- Passport size Photograph
ELSS or PPF?
Disclaimer: Much of the article from herein is the author’s personal opinion.
Now, to answer the question that was posed at the beginning of this article, we have to look at the schemes themselves.
The commonality between the two is that they are both tax-saving schemes under Section 80c. PPF is one of the best options Indians have to make a long-term investment, such as a retirement fund. It is also very easy to access due to the low minimum amounts and the ease of opening an account. Another benefit of choosing PPF is that it is one of the very few investment options that fall into the Exempt-Exempt-Exempt (EEE) category, meaning that any returns at all, be it interest or anything else gained from the account, are completely and entirely tax-exempt, unlike ELSS, which is only partially tax exempt. As a caveat to this, however, PPF only allows for Rs. 1.5 lakh to be invested in it per year.
ELSS, on the other hand, has no cap on how much you can invest in it per year. It is also the only investment option that provides inflation-beating returns while also saving on taxes. It is also a good long-term investment, just not quite as long-term as a PPF account. As an investor in ELSS, one should always look for an investment horizon in the range of 5 to 10 years. However, you may only save Rs. 1.5 lakh on returns from investing in ELSS per year under Section 80c. The lock-in period of only being 3 years also provides ELSS holders with a significant amount of liquidity.
In conclusion, it depends on whether the investor is looking to secure their money or to grow it. Investing in both of these schemes is also not a bad idea if one has the funds for it, as a much larger amount of tax is saved. ELSSes are, however, subject to market risk, so one should be cautious regarding the particular ELSS they are investing in. PPF, on the other hand, provides much more secure capital at the cost of being able to grow it in real terms.
