Taxes consume a big share of your hard-earned money. However, the government allows you to reduce your tax charges by investing in specific schemes. Two of the most popular tax-saving investments under Section 80C are Equity Linked Savings Scheme (ELSS) and Public Provident Fund (PPF). ELSS is a mutual fund investment that can generate inflation-beating returns, while PPF is a non-market linked investment that offers guaranteed returns. Each investment option has its advantages and disadvantages. Choosing between the two investments depends on your risk tolerance, financial goals, and investment horizon.
Here is a quick insight into ELSS and PPF investments and which one should you choose for tax savings:
What is ELSS?
ELSS is a mutual fund scheme that mainly invests your money in equity and equity-related securities. You can invest in ELSS through lump sum or SIP (Systematic Investment Plan). ELSS mutual funds have a minimum lock-in period of three years, and the returns from the scheme depend on your underlying mutual fund portfolio. On average, you can expect 12-15% returns from ELSS mutual funds, which are considerably higher than other investments.
ELSS mutual funds also give you tax benefits. Under Section 80C of the Income Tax Act, 1961, your annual ELSS investments up to Rs. 1.5 lakhs are tax exempt. Returns up to Rs. 1 lakh from ELSS schemes are also tax-free. Capital gains above Rs. 1 lakh from ELSS mutual funds are taxed at 10% (provided you hold your investment for one year or longer).
What is PPF?
A PPF is a government-sponsored, non-market linked scheme that gives guaranteed returns (usually between 7-8%). PPF schemes have a minimum lock-in period of 15 years, extendable by another five years. You can take partial withdrawals (up to 50% of the PPF balance) after seven years. However, you are eligible to take a loan against your PPF account balance.
PPF investments up to Rs. 1.5 lakh are eligible for tax exemption under Section 80C. The cumulative interest and the PPF maturity amount are also tax-free.
Should you invest in ELSS mutual funds or PPF for tax savings?
In terms of tax savings, PPF outweighs ELSS mutual funds. PPF investments enjoy an exempt-exempt-exempt (EEE) status, where the investment, returns, and maturity are all tax-free. Alternatively, ELSS mutual funds have limited tax benefits under Section 80C. The investment amount (up to Rs. 1.5 lakh) and returns (only up to Rs. 1 lakh) are free from taxes. However, if you use these tax advantages wisely, ELSS mutual funds can provide a significant reduction in your annual tax bill. Tax-loss harvesting strategies are useful in reducing taxes on gains above Rs. 1 lakh.
That said, PPF investments fair better than ELSS mutual funds from the tax-saving perspective, but their returns are significantly lower than ELSS. ELSS mutual funds can offer inflation-beating returns against fixed returns from PPF schemes. Moreover, ELSS mutual funds have the shortest lock-in period of three years compared to 15 years for PPF schemes, hampering liquidity in the long run.
Hence, even though PPF is a viable tax-saving investment, ELSS has proven itself a sound investment choice because of its high yields, tax benefits, long-term wealth creation, liquidity, and investment convenience. If you have a high-risk appetite, use the Tata Capital Moneyfy app to invest in an ELSS mutual fund scheme. The Moneyfy app allows you to compare, invest, monitor, and manage mutual funds from one platform.