FinBytes by Finwisor - ELSS vs PPF (for tax saving)

Let’s start with the basics first.

What are 80C Deductions?

Deductions reduce one’s taxable income and thus his tax liability. 80C is a section of Income Tax Act that describes the uses of money that are eligble for deduction. The most popular options are: provident funds, life insurance, child’s tution fees, equity linked savings scheme (Mutual Funds), 5 year bank FDs, home loan principal repayment, NSC, Sukanya Samridhi Yojana.

80C Limit

The above investments/ payments are allowable as deductions from taxable income up to a total limit of ?1.5L.

ELSS & PPF - 2 most preferred options

Return comparison

This chart shows the maturity amounts if ?1 Lacs was invested on 1st April, every year in PPF vs various ELSS schemes.

Over the long term, even the minimum ELSS return is substantially more than the PPF return. ELSS is a clear winner.

What is the difference in risk?

ELSS are equity mutual funds. The returns are thus market-linked and may fluctuate. However, the past history suggests that equities do well over a long term horizon.

Provident funds, on the other hand, have interest rates dictated by the Government and is changed every year. So, there is an interest rate fluctuation risk. There is no risk of default or capital erosion though.

What is the difference in the lock-in period?

PPF is locked in for 15 years from the first investment. ELSS on the other hand have only a 3-year lock-in.

What is the taxability of both?

PPF interest is exempt from income tax. The amount received on maturity is also tax-free.

ELSS returns are taxed based on equity taxation. i.e. 10% tax on gains above ?1Lacs. Gains exempt up to ? 1 Lacs.

What should one do?

Salaried employees may already be having EPF. Parents may be paying child’s tution fees. Some may be paying a home loan. These are done irrespective of tax saving.

For the balance (?1,50,000- above), invest in the following.

1. Take a term plan (life insurance)- for those who require life insurance.

2. Invest in ELSS (Mutual Funds)

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