Most of the people who want to do tax saving in 80C are confused if they should invest in PPF or ELSS (tax saving mutual funds). Both PPF and ELSS offer taxation benefits of up to Rs 1.5 lacs under sec 80C.
ELSS vs PPF – Meaning
Let’s start with their meaning and what exactly they are.
PPF means public provident fund. Its a govt scheme which is run by the post office and its a very safe financial product. There is no risk to it because it’s guaranteed by the govt of India. Its quite famous among investors for its safety and assured returns.
On the other hand ELSS (Equity linked saving scheme) is fairly new financial product in India (from last 15 yrs). It’s mainly an equity mutual fund that gives you an income tax benefit. Equity mutual funds mainly invest in stocks of companies, which makes sure that they deliver high returns, but at the same time they are risky (actually volatile) and their returns keep going up and down.
Now, let’s compare PPF and ELSS on various parameters.
#1 – Returns
The returns in PPF change every year and it’s around 7.5-8 %. Right now its 7.8% and it keeps on changing from time to time which is notified by govt. Earlier many years back, PPF returns were in a range of 12% and then it came down to 9%. But from the last few years, it’s hovering around 8%.
In the case of ELSS, it’s linked to the market and the returns are not fixed in the short term. Some years it can be 20 %, some times it can be 50% and in some years it can be -25% also. So you can see that the returns are totally dependent on stock markets and how well they perform. However, in the long term, you can be assured that you will get a return in the range of 12-18%. The returns are not at all guaranteed by anyone.
#2 – Lock-in Period
Your PPF investments are locked in for 15 yrs, but some partial money can be withdrawn after 7 yrs. So basically its a very long term product, and if you are investing in PPF, you should be ready to lock you money for a very long time. After 15 yrs, you can again extend your PPF for another 5 yrs (any number of times) and your money will again be locked for that 5 yrs.
On the other hand, ELSS has a lock-in for just 3 yrs. You can take out your money after 3 yrs. The important point to note here is that each investment is locked in for 3 yrs, so if you have a SIP running in an ELSS fund, then each installment is locked for 36 months.
So if you want money in 4-5 yrs, ELSS is a better choice compared to PPF from a liquidity point of view.
#3 – RISK
PPF is not at all risky because its value does not go down. PPF is also guaranteed by govt, so there are no changes in fraud. If you plot the graph of your PPF value, you will see a straight line going up. However, note that PPF has a totally different kind of risk, which is that it does not give inflation-adjusted positive returns. This means that its returns match the inflation and in the end, you do not have any net returns.
On the other hand, ELSS is volatile, which is often referred to as “RISK” . The value of ELSSS keeps going up and down depending on the stock market movements. In the short term, you might experience a downturn and loss in value, but over the longer-term, you will see good results.
As most of the investors are risk-averse and do not like to see a dip in the value of their investments, most of the investors stay away from ELSS or stocks in general and lose the chance to experience great returns at the same time.
#4 – Taxation
PPF is tax-free. There is no tax on PPF returns. Whatever returns you get in PPF is 100% tax-exempt.
Earlier ELSS was also tax-exempt after 1 yr, but with budget 2017-2018, now any gains in equity mutual funds or stocks are taxable @10% when you sell them, but you get an exemption of Rs 1 lac per yr. This means that if your profit after selling ELSS is 4 lacs, then you have to pay a 10% tax on 3 lacs. However, even after this taxation, the post-tax returns of ELSS are much better than any other investment option.
Here is an infographic that shows you a quick comparison between PPF and ELSS.
How to invest in PPF or ELSS?
If you want to invest in the PPF account, you can open a PPF account in a post office or any bank (generally SBI is very famous for PPF). Note that it does not matter where you are opening your PPF account, if you open with the post office, SBI, or ICICI .. at all the places you are going to get the same interest because ultimately it’s controlled by POST OFFICE only.
The banks are just a medium to invest and nothing else.
If you want to invest in ELSS, then you can choose any fund house (there are many AMC like ICICI, HDFC, SBI, Motilal Oswal etc). You can either go to their website directly or contact an advisor (You can also invest in ELSS through Jagoinvestor help)
Returns of ELSS and PPF from the last 20 years
It’s important to check how PPF and ELSS have performed in the last 20 yrs (1996 – 2016) so that you get a fair idea on their performance and which one is better from a long term point of view. So we took one of the famous ELSS (HDFC Tax Saver) as an example along with PPF and calculated how the value in both will increase over time if someone invests Rs 1 lac in both the financial product.
In the above table, you can see that Rs 1 lac of yearly investment for 20 yrs have accumulated to Rs 54 lacs in PPF, whereas it becomes 2.2 crores in the ELSS, which means that ELSS gave 5 times more returns than PPF.
However, this difference is more visible only after 10 yrs passed and compounding starts kicking in.
In the initial years, there was no big difference in their values. See the graph given below. You will get a clear idea of how ELSS has performed incredibly towards the end of tenure.
Important Note :
The example of HDFC Tax Saver is taken only for the illustration purpose. This is not a recommendation, and right now HDFC Tax saver is not the best option for tax saving. There are many other ELSS funds which can be chosen other than HDFC Tax saver. Kindly contact your Financial Advisor for any recommendations.
So after studying the table data and graph, I hope it becomes easier for you to know the difference between the returns from PPF and ELSS investments. If you still have any confusion or any doubt in your mind, feel free to ask us by leaving your query in our comment section.