If you want to accumulate wealth for retirement, you need to seriously consider investing in the market. Just saving money is not enough and, it is not even practical. One possible investment option that you can opt for is mutual funds or their numerous variants.
Apart from accumulating wealth, another reason why people consider investing is to save taxes. When it comes to mutual funds, there is one scheme that can help you in saving taxes. The said scheme is ELSS, i.e., an equity-linked savings scheme, which is known for investing primarily in equities. However, one of its alluring features is its tax-saving facilities. But there is another scheme that isn’t a mutual fund variant. The said scheme is the public provident fund, i.e., PPF. If you are wondering, which one to choose between these two, continue reading to know more.
What are equity-linked savings schemes?
Known for mostly allocating funds to equities, ELSS is known for its tax-saving benefits that can be availed under Section 80C. However, since these schemes invest primarily in equities, the performance and returns are linked to the market. Thus, investments are subject to market volatility.
What are its key features?
- Investments up to ₹1,50,000 annually are exempted from taxes in accordance with Section 80C of The Indian Income Tax Act, 1961.
- It is possible to keep investing in ELSS even when the lock-in period of three years is completed. This feature helps in long-term wealth generation.
- While the degree of risks involved in ELSS is high, the potential returns on them are high too.
- It is one of the viable investment options if you are seeking a scheme that offers not only tax benefits and high returns, but also comes with a short lock-in period.
What are public provident funds (PPF)?
Credited to The Government of India, PPFs were introduced as a scheme that can encourage people to save money and thereby create a provision for their old age. Anyone who is a citizen of India can sign up for this scheme. Moreover, it is also possible to activate a joint PPF account for minors too.
What are its key features?
- Similar to ELSS, one can claim deductions up to ₹1,50,000 annually under Section 80C.
- It is possible to select a nominee for your PPF account. If there are no nominees, the legal heirs get the amount that got accumulated in the account.
- You can either contribute to your PPF account in 12 instalments or an annual lump sum.
- As they are backed by the Government of India, PPF is a risk-free investment.
- While the minimum investment amount for a PPF account is ₹500, the maximum amount for depositing in a year is ₹1,50,000.
- They come with a mandatory lock-in period of 15 years. But you can extend this scheme for five more years after the lock-in period ends.
- The interest earned on the amount at the time of maturity is considered tax-free.
PPF vs ELSS:
Both ELSS and PPF are tax-saving options that make use of Section 80C. However, that’s where their similarities end. The table below points out their differences:
| Features | PPF | ELSS |
| Risks involved | They are considered safe because PPF was initiated by the government. | As they are a type of equity funds, funds here are subjected to market risks. |
| Returns to expect | Annually, the government is known for announcing the rate of interest. Generally, it is somewhere between 7% and 8% p.a. | As the performance is linked to the market, the returns may vary and even that depends on the scheme chosen. However, one can expect somewhere between 12 to 14%. |
| Lock-in period | These schemes come with a lock-in period of 15 years. However, after the 5th year, you can opt for partial withdrawals. | These schemes are equipped with a lock-in period of 3 years. However, unlike PPF there are no provisions for a premature withdrawal. |
| The Time-limit for investment | After 15 years, you cannot continue investing in this scheme. However, it is possible to extend it to 5 more years. | There are no upper time limits. |
Based on the information provided in the table, you may think that PPFs are a safer option. However, the downside of PPFs is that they are known for offering lower returns over a longer time horizon than ELSS funds. While PPFs check out for things like capital safety, ELSS is an ideal option if you seek better returns. Ultimately, the choice depends on whether you possess the appetite to face market volatility or not.
