Equity Linked Savings Scheme (ELSS) is a type of mutual fund that primarily invests in equity and equity-related instruments. ELSS funds offer tax benefits under Section 80C of the Income Tax Act, making them popular among investors for tax planning purposes.
What is Equity Linked Savings Scheme (ELSS)?:
How Does ELSS Work?
ELSS funds invest a significant portion of their assets in equities, typically around 80-100%. The remaining portion may be invested in debt securities or cash equivalents to manage risk.
ELSS funds have a lock-in period of three years, which means investors cannot redeem their investments before the completion of three years from the date of investment. However, this lock-in period is relatively shorter compared to other tax-saving instruments like Public Provident Fund (PPF) or National Savings Certificate (NSC).
Tax Benefits of ELSS:
Investments in ELSS funds qualify for tax deductions under Section 80C of the Income Tax Act, up to a maximum limit of ₹1.5 lakh per financial year. Additionally, any capital gains earned from ELSS investments held for more than one year are treated as long-term capital gains (LTCG) and are tax-exempt up to ₹1 lakh. LTCG above ₹1 lakh is taxed at a rate of 10%.
Key Features of ELSS:
Tax Benefits: ELSS offers tax deductions under Section 80C of the Income Tax Act.
Lock-in Period: ELSS funds have a lock-in period of three years.
Equity Exposure: ELSS funds primarily invest in equities, providing potential for higher returns over the long term.
Flexibility: ELSS funds offer flexibility in terms of investment amount and frequency.
Potential for Wealth Creation: Due to their exposure to equities, ELSS funds have the potential to generate wealth over the long term.
Public Provident Fund (PPF):
What is PPF?
The Public Provident Fund (PPF) is a long-term savings scheme backed by the Indian government. It is one of the most popular tax-saving and retirement planning instruments in India. PPF offers attractive interest rates and tax benefits to investors.
How Does PPF Work?
PPF accounts can be opened at designated post offices and authorized banks. Investors can also open PPF accounts online through certain banks. PPF accounts have a maturity period of 15 years, which can be extended in blocks of five years indefinitely.
Investors can deposit a minimum of ₹500 and a maximum of ₹1.5 lakh per financial year in their PPF accounts. Deposits can be made in lump sum or in a maximum of 12 installments per year.
Tax Benefits of PPF:
Investments in PPF qualify for tax deductions under Section 80C of the Income Tax Act, up to a maximum limit of ₹1.5 lakh per financial year. Additionally, interest earned on PPF investments is tax-free.
Key Features of PPF:
Tax Benefits: PPF offers tax deductions under Section 80C of the Income Tax Act.
Long-term Savings: PPF has a maturity period of 15 years, making it suitable for long-term savings and retirement planning.
Attractive Interest Rates: PPF offers competitive interest rates that are set by the government and are compounded annually.
Partial Withdrawals: Investors can make partial withdrawals from their PPF accounts after the completion of the sixth financial year, subject to certain conditions.
Loan Facility: Investors can avail of loans against their PPF deposits from the third financial year up to the sixth financial year.
Comparison ELSS vs PPF:
Nature of Investment: ELSS invests primarily in equities, offering potential for higher returns but with higher risk. PPF is a government-backed savings scheme with guaranteed returns and lower risk.
Lock-in Period: ELSS has a lock-in period of three years, while PPF has a maturity period of 15 years.
Tax Benefits: Both ELSS and PPF offer tax benefits under Section 80C of the Income Tax Act, but the tax treatment of returns differs. ELSS returns are subject to capital gains tax, while PPF returns are tax-free.
ELSS Vs PPF |
LUMPSUM INVESTMENT Rs. 1,50,000/- |
||||||
Period |
BEST ELSS |
WORST ELSS |
PPF |
|||
Maturity |
CAGR |
Maturity |
CAGR |
Maturity |
CAGR |
|
15 Years
|
21,87,640/- |
18% |
8,99,367/- |
12% |
5,24,128/- |
8.37% |
10 Years
|
8,30,781/- |
17.24% |
5,0,460/- |
12.17% |
3,42,335/- |
8.28% |
5 Years
|
3,75,852/- |
18.51% |
2,92,220/- |
13.41% |
2,20,511/- |
7.73% |
SIP INVESTMENT Rs. 10,000/- PER MONTH |
||||||
Period |
BEST ELSS |
WORST ELSS |
PPF |
|||
Maturity |
CAGR |
Maturity |
CAGR |
Maturity |
CAGR |
|
15 Years |
96,93,980/- |
18.51% |
52,78,849/- |
12.47% |
35,94,566/- |
8.35% |
10 Years |
46,23,729/- |
22.89% |
21,26,594/- |
10.50% |
18,57,378/- |
8.15% |
5 Years |
13,73,789/- |
29.51% |
8,04,233/- |
11.08% |
7,37,086/- |
7.87% |
Data from sources on 09th May, 2024
(In the long run, even the Worst ELSS beat PPF, Average ELSS can make good returns & can create enormous wealth using regular SIPs)
Conclusion:
ELSS and PPF are both popular tax-saving instruments in India, offering investors different investment options based on their risk appetite, investment horizon, and financial goals. ELSS is suitable for investors seeking exposure to equities and potential for higher returns over the long term, while PPF is ideal for risk-averse investors looking for guaranteed returns and long-term savings. It's important for investors to consider their financial objectives and risk tolerance before choosing between ELSS and
Since ELSS and PPF are fundamentally different investment vehicles with varying return profiles, it's important to note that ELSS investments are subject to market risks while PPF offers guaranteed returns set by the government, which may vary from year to year but are generally lower risk. However, I can provide a hypothetical comparison based on historical Maximum Returns, Minimum Returns and Average Returns for illustrative purposes.
Please note that past performance is not indicative of future results and actual returns may vary.
**Please note that these figures may vary significantly based on market conditions, fund performance and other factors. Investors should consult with financial professionals and conduct thorough research before making investment decisions.