• HDFC securities
• 07 Feb 2023
• A complete comparison between ELSS and PPF,Knowledge Centre

 

Two of the many popular financial investment options available to investors are Equity Linked Savings Scheme or ELSS and Public Provident Fund or PPF. Let us understand the difference between PPF and ELSS to make an informed investment decision.

What is ELSS?

ELSS refers to Equity Linked Savings Scheme and is a type of mutual fund that invests in equities. The returns generated by an ELSS depend upon the performance of the market. Additionally, ELSS also offer income tax benefits to investors.

What is PPF?

Public Provident Fund, also known as PPF, is a government-backed investment scheme. It offers investors guaranteed returns along with tax benefits under Section 80C of the Income Tax Act. Investors earn interest on PPF as per rates decided by the government.

 

Which is Better; ELSS or PPF?

To arrive at the conclusion of which is better, we must compare ELSS and PPF.

ELSS vs PPF: Key Differences

• Safety:

PPF is backed by the government and hence offers the safety of capital and also fixed returns. On the other hand, ELSS is exposed to market risk as they invest in equity markets that are volatile and comparatively risky.

• Returns:

The interest rate applicable for PPF are determined by the government. Thus, they are fixed and stable. However, with ELSS you can invest in equity and stand the chance to earn high returns. Plus, it also compounds over the long term.

• Lock-in:

PPF investments come with a lock-in period of 15 years which is considerably higher. However, investors get an option for partial withdrawal only after the completion of 5 years.

On the other hand, ELSS only comes with a lock-in period of 3 years.

• Liquidity:

Although a PPF comes with a longer lock-in period, you can opt for partial withdrawal of your investment after 5 years have expired since you opened your account. Investing in ELSS lets to enjoy a higher degree of liquidity since the lock-in period is so short.

• Tax:

The deposits made in the PPF account, the interest earned and the maturity amount are all tax-free under section 80C of the Income Tax Act. Similarly, ELSS investments up to Rs 1.5 lakh a year are also exempted from tax under section 80C. However, the returns earned on ELSS investments are tax-exempt only up to Rs 1 lakh. Returns above Rs 1 lakh are considered Long-Term Capital Gains (LTCG) and are taxed at the rate of 10% tax.

 

 

When it comes to choosing between PPF or ELSS, you can consider the points of difference listed above. Since both investment options have pros and cons, you can pick one that suits your financial goals. For instance, if you want to make a safe investment that is completely tax-exempt and does not mind the lock-in period, PPF is the right option for you. On the other hand, if you are looking to earn higher returns, and are comfortable with a measure of risk, then look into ELSS. At the end of the day, evaluate your financial needs and make an informed decision accordingly.