PPF VS ELSS: Make the Best Tax Saving Investment This Year
While both are transparent in terms of their fees, their risk profiles differ vastly, one has to consider a lot of aspects before making the move to invest
We just crossed the end of the financial year when many of us are in a rush to contemplate over the best possible way of saving up on income tax. In a bid to save a lot in the last minute, many end up making financial errors that tend to cost them awfully in the long run. Many a time, investments are made in unsuitable financial products without evaluating the pros and cons properly. As a result, investors are sometimes not able to fully leverage the various deductions and exemptions available to them. So, if you want to make the right decisions this tax-saving season, focus on making long-term savings, instead of the short ones made in haste. So how can one decide the best tax saving plan?
While there are a lot of tax saving investment options like the 5-Year Fixed Deposit, Term Life Insurance, Money-back Life Insurance (Endowment plans), ULIPs and Tax Saver Mutual Funds (ELSS), ELSS and PPF (Public Provident Fund) have been two of the most popular saving instruments among the taxpayers.
What are ELSS and PPF?
While ELSS has been in the investment picture for more than 2 decades now, it has emerged as a robust tax-saving avenue only in the last couple of years driven by the rapid growth in the equity Mutual Funds. This tax-saving equity mutual fund is issued by the registered AMCs (mutual funds) in India. Meanwhile, PPF is a debt product backed by the Government of India, which offers safe returns with an attractive interest rate that are fully exempted from tax. While both are transparent in terms of their fees, their risk profiles differ vastly. One has to consider a lot of aspects before making the move to invest.
Risk / Return Implications
On the ground of risk, PPF definitely scores more than ELSS and is more secure. Since the plan is backed by the government of India, it is nearly default-free. However, investors are required to lock-in their money for a long period of 15 years in PPF with a minimum withdrawal lock-in for 7 years. This means that even if the interest rates in the market rise during this lock-in period, the investors will be stuck to the lower rates in PPF. In contrast, the returns of equity-driven ELSS are not fixed and entirely dependent on the performance of the ELSS portfolio. Despite the short-term ups and downs of the stock market, they yield inflation-beating returns in the long run, without considering the tax exemption under Section 80C of the Income Tax Act. The best part is the lock-in period, which in this case is a minimum of 3 years.
We all are aware that both ELSS and PPF qualify for Section 80C exemption on investments up to INR 1,50,000 each financial year. While the interest on PPF is completely tax-free for the investors, dividends on equity funds involve a TDS tax of 10per cent, from Apr-2018 whereas PPF attracts no such tax at the time of redemption. According to the latest mutual fund taxation system, long-term capital gains on ELSS will be tax-free only up to a total limit of INR 1 lakh per annum. Gains beyond that will draw an LTCG tax of 10per cent.
This is where ELSS scores big as it comes with the shortest lock-in period of just 3 years, after which it is upon the investors to decide whether they want to withdraw the entire amount or reinvest in another ELSS and claim the benefits under Section 80C after every third year. On the other hand, PPF comes with a lock-in period of 15 years. However, investors can avail the sporadic liquidity facility of withdrawing their PPF after the completion of 7 years. After 3 years, PPF also enables the investor to take a loan against investment, which gets funded up to 90per cent of the PPF balance in their account. Unfortunately, post the lock-in period, funding against an ELSS is restricted to just 50per cent of the market value.
Who Scores Big in Long-Term Wealth Making?
Wealth creation cannot happen without taking risks and investors must think over it. In ELSS the returns are linked to stock markets and fluctuate in the short term but in the long run, they are well above inflation whereas in PPF rates are close to inflation - thus barely maintaining the purchasing power of the money invested. The power of getting the wealth augmented is more likely in the case of ELSS whereas, with 8per cent annual rate of return in PPF, the long-term wealth creation is indeed constrained. Indeed, ELSS has generated 7-9 times more returns than PPF during the last 15 years!
Looking at all the pros and cons of both the investment plans, PPF undeniably comes as a safer option with sure shot tax benefits but low returns. After all playing safe comes at a cost. However, if you can stomach the fluctuations of the market, ELSS is the key to better returns, regardless of the short term gains and losses.
Ankur Choudhary is the co-founder and CIO of Goalwise, a unique goal-based investment platform that leverages data-driven algorithms to offer suitable mutual fund investment plans to its customers. At Goalwise, Ankur is responsible for creating investment strategies including Mutual Fund selection and asset allocation strategies, while also overseeing the product and content functions.