ELSS vs PPF: Comparison of ELSS with PPF

Published On: 12-Aug-2020

Public Provident Fund (PPF) has traditionally been the preferred investment option to save taxes, for it suits the investing preferences of conservative investors looking for assured returns. However, with the increasing awareness on financial planning and on availability of multiple options, Equity Linked Savings Schemes (ELSS) is becoming one of the choices of retail investors to save taxes. Considering the primary objective of investing, which is saving taxes, let’s understand amongst PPF and ELSS, which one stands better. 

A picture containing drawing

Description automatically generated

There are many more benefits of investing in Tax-saving Mutual Funds. These benefits are not available in other Tax-saving instruments. Here’s a comparison of ELSS with other Tax-saving instruments:

Growth of Rs.1.5 Lakhs invested each year for last 10 years

(Rs.10 Lakhs in total) in various tax-saving avenues

 

PPF

NSC

FD

ELSS

Category Average

Investment to save tax

every year on 1 April

(since 2010 to 2019)

Rs.1.50 lakh

Rs.1.50 lakh

Rs.1.50 lakh

Rs.1.50 lakh

CAGR over the last 10

Year

8.28%

8.25%

7.31%

12.61%$

Investment Value as of

Jan 31, 2020

Rs. 23.55 lakhs

Rs. 23.50 lakhs

Rs. 22.32 lakhs

Rs.29.21 lakhs

Features

Tenure

15 years

5 years

5 years

Perpetual

with 3 years

lock-in

Liquidity

Premature

withdrawal

allowed*

Not Available

Not Available

Any day post

completion

of lock-in##

Yearly

Returns

Range**

Lowest

7.60%

8.00%

6.00%

-6.79%

Highest

8.80%

8.60%

9.25%

49.20%

Average

8.31%

8.25%

7.65%

12.14%

Risk Profile

Low

Low

Low

Moderate to

High

Mode of Contribution

Lump Sum / Monthly#

Lump Sum

Lump Sum

Lump Sum

/ SIP

Taxation on withdrawals

Interest

accrued is

Tax-free

Interest

accrued is

Taxable

Interest

accrued is

Taxable

LTCG taxable

@ 10%

 
Source: For FD rate - Fixed deposit rates of SBI, For NSC & PPF - Ministry of Finance, For ELSS - MFI Explorer

Disclaimer: Assuming that the said investments (lump sum) are made on 1st April of each year from 2010 to 2019 in each of the tax savings options as mentioned above. ELSS – Average returns of 27 funds (having full 10 years track record) in the ELSS category (growth option) has been considered for calculation of returns. Past performance may or may not be sustained in future. $ ELSS category returns based on the average returns over the 10 years period, there was high variation in returns among different schemes with highest & lowest CAGR being 16.51% & 7.36% respectively. * Premature withdrawal under PPF is available from 7th financial year. However, the full amount can be withdrawn after 15 years. **Based on the last 10 years return history of respective tax-saving options #Cannot exceed 12 contributions in a financial year. ##3 years lock-in for each of the investments made. SIP - Systematic Investment Plan; LTCG – Long Term Capital Gain; CAGR - Compound Annual Growth Rate. Data as of January 31, 2020. PPF(Public Provident Fund) ,NSC(National savings certificate),FD(Fixed deposit),ELSS(equity linked savings scheme) ~As per the present tax laws, eligible investors (Individual/HUF) are entitled to deduction from their gross total income, of the amount invested in equity linked saving scheme (ELSS) upto Rs. 1,50,000/- (along with other prescribed investments) under Section 80C of the Income Tax Act, 1961. Subject to prevailing tax laws.

Note: -*Calculations are based on monthly SIP investment with an assumed annual growth rate, Corpus at 12% - `2.13 Crores; Corpus at 10% - `1.55 Crores; Corpus at 8% - `1.14Crores. Above is for illustration purposes only and not an indication nor guarantee of returns.

Tax Benefits

Both, ELSS and PPF, are eligible investment options under Section 80C of the Income Act 1961, which allow tax benefits of up to an aggregate amount of Rs. 1.50 lakhs in a year across all the eligible deductions. As such, any amount within the said limits invested in either of the options makes one eligible for tax benefits under Section 80C of IT Act 1961.

Lock-in Period

Since both, ELSS and PPF, carry tax benefits, the lock-in restrictions apply on both the investment options. The period to operate a PPF account is 15 years. Upon the expiry, the PFF account can be further extended for five years. However, if account holders are in need of funds, and wish to withdraw before 15 years, the scheme permits partial withdrawals from year 7 i.e. on completing 6 years. On the other hand, ELSS carries a lock-in period of 3 years, the lowest lock-in period amongst all the available investment options under Section 80C of IT Act 1961.

Returns for the Investors

The Finance Ministry set the interest rate every year for the PPF investments. PPF allows a minimum investment of Rs 500 and a maximum of Rs 1.50 lakhs for each financial year. The current interest rate notified for PPF accounts is 7.1% per annum as applicable from April 1st, 2020 (Source – Ministry of Finance). 

On the other hand, the returns from ELSS are market-linked. Considering the historical performance, equity as an asset class has relatively superior performance although it comes with good volatility in the medium to short term. 

Tax Incidence

As per the Income Tax laws (as amended up to Finance No. 2 Act 2019), the interest income received from PPF investment is exempt from tax. However, on the other hand, the returns on ELSS funds are taxed Capital gains are taxed at 10% (plus applicable cess and surcharge, if any). Furthermore, any long-term gains from equity shares and equity-oriented mutual funds (including ELSS) of up to Rs. 1 lakh in a year are exempt from taxes and the applicable taxes are taxed only on gains beyond Rs. 1 lakh. 

Investment Period

As per the PPF investment mandate investors don’t have flexibility in terms of operation of the account during its investment tenure of 15 years. However, ELSS funds score higher in terms of such flexibility. After the completion of the 3-year lock-in period, one can remain invested or based on their needs, they can withdraw the funds. 

There are many more benefits of investing in Tax-saving Mutual Funds. These benefits are not available in other Tax-saving instruments. Here’s a comparison of ELSS with other Tax-saving instruments: Thereby, ELSS can be considered as a choice for one’s tax planning and for long-term wealth creation over the traditional investment avenues.

NoteThe tax provisions, as mentioned in the article, are only for illustrative purposes. You must consult your tax advisor for detailed tax incidence for your investments.

Disclaimers: The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance bill 2020. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SIA carefully before taking any decision.

UTI AMC Ltd is not an investment adviser, and is not purporting to provide you with investment, legal or tax advice. UTI AMC Ltd or UTI Mutual Fund (acting through UTI Trustee Company Pvt. Ltd) accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services.