The Dilemma of tax Saving : ELSS Vs. PPF
Equity Linked Saving Scheme (ELSS) & Public Provident Fund (PPF) are the most preferred, talked about & most preferred tax saving instruments. With market doing exceedingly well in the last couple of months, ELSS is gaining all the more momentum. The real dilemma with the taxpayers is making the correct choice between ELSS Vs. PPF. The choice becomes all the more difficult considering the fact that both operate under EEE Model i.e., investment in these instruments offers tax Exemption, income earned out of this investment is also Exempt, and the withdrawals of amount is also tax Exempt. Here are few parameters that can help you in choosing the correct investment amongst two:
PPF offers fixed & assured returns like Bank FDR. The government securities are considered the most secure investment. As against this, ELSS invests the money in share market and is directly linked to the market sentiment. ELSS swings with the market & investment carries a risk associated with stock exchange. ELSS has capacity to double your investment in a shorter span of time and also the power of substantially wiping out your capital. ELSS never operates on a fixed return model & its return is contingent depends upon the performance of the share market.
The Return Comparison of ELSS and PPF
Both the investments need to carry a different objectives & mindset. ELSS moves money in to the share market to maximize the return, whereas PPF investment in government bonds which yields are normally in line with the bank fixed deposit. The interest rate of PPF is fixed every year & is broadly dependant on 10 year government bond yield. The interest rate of PPF is similar to 5-10 year bank FD.
No risk no gain is the fundamental that investor should carry while deciding ELSS as an investment model. History has shown that equity has the capability to give the fabulous return in the long term. Actual gain in ELSS depends upon the entry & exit time of investments. Investment when market is low & exit when the market is at peak results in wealth creation. Reverse results in erosion of wealth.
Unlike PPF, it never offers fixed or assured returns.
Tax Benefit Of ELSS Vs PPF
ELSS and PPF both offers tax benefit. Under section 80C of the Income Tax Act-1961, investment in ELSS and PPF give you a full deduction from income up to a maximum of Rs. 1.50 Lakh p.a. As discussed above, both the investments belongs to EEE category i.e., Exempt, exempt, and Exempt which means that there is tax exemption at the time of investment, interest or income accrued thereon is also tax free & the maturity proceeds also carries no tax. Only disadvantage is that under 80C, anyone can’t get deduction of an amount exceeding Rs. 1.50 lakh p.a..
Lock in period:
Almost all the investments which offers tax benefit are with some lock in period. PPF & ELSS are no more exception. The ELSS and PPF both lock the investment for some fixed period. A PPF account is for minimum 15 years. One can get back the maturity amount after the completion of 15 financial years. However, one can avail loan against PPF after completion of 5 full financial years. The ELSS is more flexible in this regard as it carried a lesser lock in period of only 3 years.
One can invest minimum Rs 500 in both ELSS and PPF. Howeverm, there is a max ceiling Rs. 1.50 Lakh for investment in PPF A/c. There is no such restriction in ELSS. Further, in a PPF account, one has to invest minimum Rs 500 per year. ELSS doesn’t have such limitation.
Back to the original issue, whether to invest in ELSS or PPF, Both have positives as well as negatives, advantage as well a advantages. Above parameter can provide the guidance. It is the risk appetite that plays the pivotal role in choosing the correct investment model.
Taxpayers with following parameters can invest in ELSS:
– Looking for a shorter holing period
– Knows & understands the share market
– Looking for investment for a longer period i.e., more than 15 years
– Retirement is several years far
– Believes in the principle “No Risk- No Gain”
Taxpayers with following parameters can invest in PPF:
Person who has the following attributes:
– Looking for safety of money.
– Looking for regular investments.
– Also looking for safe income rather than risky returns
– Can wait for 15 long years
– On the verge of retirement
If it is still difficult to make the choice, choose a combo i.e., a middle path. Invest party in ELSS & Partly in PPF.