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ELSS vs PPF: Better Tax Saver Or Investment Tool?

Dec 12, 2018(11:09)
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The importance of saving and investing to meet the future needs of individuals and families has always been emphasized. A well chalked out plan with a fair idea of the approximate amount needed for specific goals is very crucial to decide the kind of investment amount, tools and period that needs to achieve.  However, not all individuals follow this thumb rule of investment and a large number of people usually invest only between December to March in order to avoid paying taxes, as the Indian Government, under the Income Tax Act, Section 80C encourages individuals to save and invest and has exempted up to Rs. 1,50,000 in deductions on investments. In this hustle, people do not take much time to understand the financial products and invest in the traditionally preferred options.

Two of the most popular investment tools under the tax expected category are PPF and ELSS. Let's attempt to understand these tools and their functioning.

Public Provident Fund (PPF):

PPF is a long-term investment scheme introduced by the Indian Government in 1968 in order to encourage people to save and invest for retirement. The investments made in PPF are tax exempted u/s 80C of the Income Tax Act. To invest in PPF any resident citizen of India can open a PPF account in a bank or post office. A joint PPF account can be opened for minors with a parent or a legal guardian. PPF investments have a lock-in period of 15 years with a fixed rate of return of 7.6%.

Equity Linked Saving Scheme (ELSS):

ELSS is a type of mutual fund which as the name suggests invests largely in equity and equity related instruments. Due to the equity exposure, the performance of ELSS is dependent on the stock market and is a high-risk high-return product. ELSS like PPF is tax exempted u/s 80C of the Income Tax Act and has a lock-in period of 3 years. One can select from over 50 ELSS offered by 21 AMCs. Although investments in ELSS are tax exempted, if the returns exceed Rs 1 lakh 10% tax will be applicable on the returns under the recently introduced Long-Term Capital Gain (LTGC) tax.

PPF ELSS
Lock-In Period 15 years 3 years
Return Fixed returns of 7.6%.
Government can change the rate. It was earlier 12%.
Expected returns can range between 12% and 15%.
Market-linked instrument with high volatility.
Suitability Better suited for risk-averse investors. Better suited for investors with a moderate risk appetite.
Minimum Investment Rs. 500 per annum

Rs. 500

Maximum Investment Rs. 1,50,000 per annum. No upper cap is fixed.
Liquidity Partial withdrawal can only be made after 7 years. Cannot be liquidated until 3 years are complete.
Loan Availability A loan can be availed after completion of 3 years. Not Available.
NRIs can invest No Yes

While both the investment options have their own set of pros and cons, financial advisors recommend ELSS to moderately risk-averse investors as along with tax exemption, it also provides better growth opportunity for the invested money with a smaller lock-in period.

For instance, if an individual invests Rs. 1,50,000 in PPF, in 15 years, at the rate of 7.6% the investor is likely to receive Rs. 4,50,000 at maturity, making a profit of Rs. 3,00.00. On the other hand, if the investor selects to invest Rs. 1,50,000 in ELSS, for 3 years, at the rate to 15% the investor is likely to receive Rs. 2,28,000 and Rs. 12,20,000 in 15 years.

PPF ELSS
Amount Invested 1,50,000 1,50,000
Returns 7.6%* 15%**
Years 15 15
Maturity Amount 4,50,000 12,20,000
Profit 3,00,000 10,70,000

*7.6% return for FY17-18

** 15% return is based on historical performance of ELSS funds (ASBL, Franklin tax Shield)

To further emphasize, SIP of Rs. 10,000 made in ELSS (ABSL 96 Tax relief G) for last 10 years has yielded CAGR of 18.4% and a return of Rs. 34 lakh as compared to PPF with a yield of 8.2% and the return of Rs. 18 lakh. Following table comprises the performance of few ELSS Mutual Funds:

Scheme Name Absolute (%) CAGR (%)
1 Year 3 Year 5 Year SINCE INCEPTION
HDFC Long Term Adv. Fund(G) -4.07 12.23 15.52 21.55
L&T Tax Adv. Fund-Reg. (G) -5.77 12.10 16.46 13.97
Principal Tax Savings Fund -9.09 12.00 17.53 16.19
IDFC Tax Adv. (ELSS) Fund-Reg. (G) -6.86 11.45 17.01 18.27
Taurus Tax Shield Fund-Reg. (G) -0.98 11.33 14.17 11.22

It is evident from these examples how ELSS investments have the potential to perform better than PPF investments. So if one does not already have adequate exposure to equity, one can choose ELSS for building wealth.



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