ELSS VS PPF
Tax planning is exceptionally fundamental for every professional or employee. Most individuals pay their taxes. However, only a few taxpayers consider tax planning tactics to decrease their taxable income and lower their tax rate.
If you are one of the intelligent taxpayers that calculate every move to ensure you pay minimum tax, you must have wondered which of the two- ELSS or PFF, is the best tax saving option, and you will get your answer here, but first, let us understand the two funds!
What is an Equity Linked Savings Scheme?
ELSS is a mutual fund that deals mainly in equity and equity-related instruments. Because ELSS mutual funds engage largely in stocks, they have the capacity to deliver market-linked gains. However, no definite yields can be promised because the returns are susceptible to market fluctuation.
What exactly is PPF?
The Public Provident Fund (PPF) is a government-sponsored savings fund that offers guaranteed yields and additional tax benefits under Section 80C. The government fixes the interest rates on PPF every quarter. The interest rates for the first quarter of FY-22-23 (April-June) have been set at 7.1 percent. Except for NRIs, the initiative is open to all Indian nationals. You can also register a joint PPF fund with a parent or legal guardian for a child.
How do ELSS and FD operate under 80C?
Growing your money exponentially by investing in the suitable schemes that give you the highest rewards demands a secure economic strategy. Individuals and households are encouraged to invest and safeguard their finances by the government through tax deductions under Section 80C of the Income Tax Act of 1961. As a taxpayer, you can employ ELSS and FD as two of the many 80C investments available.
You can deduct up to Rs.1.5 lakh from your taxable income in this way and obtain exemptions as a result. Both investment alternatives have their own advantages and disadvantages, and they appeal to individuals with various investing profiles. We will further compare the two over many vital factors.
Risk factor: The Public Provident Fund comes at a low risk as it is backed by the Indian government. Thus, they are an advantageous investment alternative for those who are incredibly risk-averse or have no capacity to bear losses. On the other hand, ELSS funds invest in equities and equity-related products. They are prone to market risks, making them a superior investment alternative for individuals capable of taking on volatility in return for long-term rewards.
Returns: The rate of interest on PPF investments is set by the Indian government, the present rate is 7.9%. The rewards on ELSS are subject to market fluctuations. ELSS funds have previously delivered annualized returns of 12 percent or more over three years.
Taxation on Returns: PPF investments provide a tax benefit in the form of tax-free returns. While in ELSS, Gains of more than INR 1 lakh are considered long-term capital gains and are taxed at a rate of 10%.
The Period of Lock-In: PPF investments consist of a 15-year lock-in period, with the provision of making a fractional withdrawal after five years. The lock-in period for equity-linked savings plans, or ELSS, is only three years. You can, however, maintain the investment for a more extended period of time.
Time Scale: In a PPF account, you can invest for 15 years, with a 5-year extension option. There is no time restriction on ELSS investments, so you can keep investing for any period of your liking.
Unpredictability: The government invests the PPF funds, and you can receive a fixed interest rate. Thus, there is no risk of volatility. ELSS funds are invested in the stock market and are exposed to market unpredictability and changes.
Availability: PPFs are available through banks and the post office. To invest, you must first create a PPF account and then go through a KYC process. Furthermore, you can create a joint PPF account with and for a minor. ELSS is a kind of mutual fund that is overseen by a financial advisor and sold by a mutual fund firm. Therefore, you can invest directly through AMC's website, online investing platforms, or Demat and registrars.
Contribution: Contributions to both the PPF and the ELSS can be made monthly or in one single payment. The minimum investing sum in a PPF is INR 500. The maximum, on the contrary, is INR 1.5 lakhs every financial year. Systematic Investment Plans are monthly payments in ELSS (SIP). You may start investing in SIPs with as little as INR 500, and there is no limit to how much you can invest. You may also learn more about the differences between a SIP and a lump-sum mutual fund.
Premature Withdrawal Facility: You can partially withdraw money from your PPF account after five years of investment, but you can't take money from an ELSS account until the three-year lock-in period is ended.
What should you invest in? ELSS or a PPF?
While both schemes save money on taxes, it's vital to choose one based on your return goals, risk tolerance, and investment time horizon. PPF is best suited to risk-averse individuals who can afford a 15-year lock-in term.
On the other hand, ELSS is for investors ready to assume a modest risk in exchange for better returns. Staying involved for the long run is the most excellent method to keep ELSS risk to a bare minimum.