PPF Vs ELSS Mutual Funds – Which is the best tax saving option?
Taxpayers always in hunt of best tax saving schemes in order to minimize their tax liability and invest in some beneficial schemes. ELSS and PPF are the two most popular tax saving investments. Both have totally different investment objectives. How PPF is, compared to ELSS Tax saving investment option? Among PPF and ELSS which is the best tax saving option?
Overview of Public Provident Fund
Public Provident Fund or PPF is a scheme that was introduced in India in the year 1968 by the ministry of finance. It acts as an important tax saving tool for the citizens of India as many benefits related to taxation are attached to it. It is primarily an account that can be opened in any authorized bank or post office. The interest earned on the PPF account is totally tax exempted. Also the amount that has been contributed can be claimed as deduction under Sec. 80C. The interest rates are governed by the central government and may be altered by them annually. The account is opened for tenure of 15 years. Currently PPF offers a 8% interest rate per annum.
Also Read: Best Tax Saving Investment Plans for higher returns
Overview of ELSS (Equity Linked Saving Scheme) Mutual Funds
Equity Linked Saving Scheme or ELSS is an open ended equity mutual fund, which is qualified for tax exemption under Sec. 80C of the Income tax Act. ELSS invests in equity related mutual funds that provides you with a growth of money if the stock market grows with time. This investment has the shortest lock-in period of 3 years. Also, there is no tax levied on the long term capital gains from these funds.
PPF Vs ELSS – Which is best tax saving investment option?
Risk factors
PPF invests in the Government bonds and the government securities are considered to be the safest instrument for investments. Hence, the risk factor here is zero. ELSS invests your money in the equity for a minimum of 65% and the balance in debt instruments. Hence the investment in ELSS is very risky. At times, you may even see your capital reduced.
Return factor
It is a well known fact that high risk gives high returns. The return in the PPF account is fixed. It hardly gives you more return than the bank’s fixed deposits. Moreover, the interest rates are fluctuating depending upon the government policies. So, once you invest the money thinking a particular rate of return may not prove to be right if the rates of interest are decreased by the government. In the other hand, ELSS invests in shares to maximize the returns. The equity can give the best returns in the long term. But, the average returns depend upon the timing of your entry and exit into the stock market. If an individual invests at the low point of the market and redeems at the market peak, he can multiply his investments in a meager time. Whereas if you invest at a high point and markets fall after that, you may even lose a big part of your capital too. Typically, if you invest for 5-8 year period, you can expect 12% to 15% annualized returns.
Tax Benefits
From the taxation point of view, both the investments are tax-free. The interest income of Public Provident Fund is totally exempted from tax and the dividend or profit so received from ELSS is free from long term capital gain. The exemption in the basic amount of investment in both the types is subject to the limit of Rs. 1,50,000 under Sec 80 C of the Income Tax Act, 1961.
Liquidity
As compared to other options, ELSS is a best saving option in terms of liquidity as it has the shortest lock-in period of 3 years. Unlike PPF, the funds are not stuck for a very period of time. Moreover, if the investor has opted for then dividend option, he can get some gains during the lock-in period also. The PPF account is opened for tenure of 15 years. One cannot withdraw money before this tenure ends. Hence, there is no liquidity in PPF. One can take loan against the PPF account or withdraw small amounts but that also are subject to many terms and conditions.
Investment limit
One cannot invest more than Rs. 1.5 Lakhs in a financial year in PPF account and a minimum of Rs. 500 has to be deposited in that account for 15 years. There is no upper limit of investment in ELSS and no minimum restriction. However the income tax benefit is received only upto Rs 1.5 Lakhs.
Also Read: Best ELSS Mutual Funds to invest in 2016-2017
Conclusion: Both PPF and ELSS are very effective tax saving tools but both have unique features. One who wants to invest safe without any risk factor involved can opt for PPF or one who invest funds keeping in mind some specific purpose of a long duration of time like marriage of children etc. ELSS is suitable for all types of investors who are not risk averse and have the need to invest in tax planning instruments. It is a good option for those who have just started their careers. But, investments in ELSS should be made considering them as high risk.
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Suresh
PPF Vs ELSS Mutual Funds – Which is the best tax saving option?
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Dear Sureshji,
I am an NRI working in Zahid Tractors in Riyadh Saudi Arabia, I don't have knowledge of Mutual Funds, I want to learn and invest in mutual funds, please advise me easiest way to learn and gain knowledge in mutual funds, I will appreciate your help……….
Hi Sayeed, Visit my blog regularly and visit Mutual fund section. Start reading articles on daily basis for a week -10 days. Once you understood basic things, please open MF account with any MF broker like icicidirect or fundsindia or investguru.in. Keep some money every month for SIP say for Rs 5,000 to start with. Start investing in top funds recommended by me for 2017 and invest in them. Get back tome in case you have any query in any of the step