Investment schemes like PPF and ELSS are investors' favourite for varied reasons. However, which of the two is a better option for you?
The tax planning season is here. The last-minute mad rush to take advantage of tax-saving schemes is yet to begin. Investment schemes like PPF and ELSS are investors’ favourite for varied reasons. PPF is preferred by conservative investors while ELSS is favourite for those who are willing to take some risk by taking exposure to equities. However, is PPF comparable with ELSS? The answer is no. Both are distinct products which are covered under Section 80C. However, ELSS scores over PPF in terms of returns delivered.
PPF is backed by the government; it offers assured interest to the investor. The interest rate for PPF is fixed by the Ministry of Finance, and the interest is compounded annually. PPF have a lock-in period of 15 years. It means that the investor cannot close the account before maturity, though the loan facility is available from 4th to 6th year of deposit.
ELSS, on the other hand, invests in equity and debt. ELSS have a lock-in period of 3 years. Thus, if the investor wants to pledge the units, he will able to do so after three years. Here one must remember that in PPF, loan facility is available only to the tune of 25% of the amount deposited whereas in ELSS units, many banks and NBFCs offer loan facility up to 50% of the NAV.
Both PPF and ELSS offer the same tax benefits, but tax-saving alone should not be the criteria of investment. Every investment decision must weigh the risk profile, risk-return ratio, investment horizon, etc. PPF and ELSS are fundamentally different products, there is no point in comparing the same.
Assuming that the investment is for the long term, ELSS has delivered better returns than PPF. Let us compare the returns of both instruments. Rs 1.50 lakh invested in PPF every year for 15 years would fetch Rs 43,60,517 at the current interest rate, whereas the same investment in ELSS would fetch around Rs 62,00,000. Clearly, ELSS is the winner.
Does it mean PPF investment is bad? No. Each investment has its own merits and demerits. As mentioned before, tax-saving should not be the only criteria. The investment, whether in PPF or ELSS, must compliment the investor’s financial goal as well. Ideally, tax-saving instruments should be part of a retirement goal planning strategy. Tax saving is a continuous exercise. The investor needs to save taxes each year. Hence, the tax benefits offered by Section 80C of the Income Tax Act must be utilized to build a decent retirement corpus.
There appears to be confusion about the taxation part too. While PPF interest is completely tax-free, long-term capital gains from ELSS are taxed at 10%. Even if we consider the tax aspect, ELSS has managed to beat PPF returns in the long term. If the investor has a home loan, chances are the benefits under Section 80C will be exhausted. Under these circumstances, ELSS offers an ideal opportunity to generate above-average returns from equities.
Instead of comparing PPF and ELSS, the investor must aim for an ideal asset allocation in his portfolio. The investment in PPF and ELSS offers an ideal asset allocation model for the investor’s portfolio. PPF has a longer lock-n period than ELSS. Assuming the investor has invested in PPF, if he requires money, he might have to wait till maturity. As a rule, PPF account can be closed only at maturity, i.e. after completion of 15 years. ELSS has a lock-in period of three years. Hence, in case of emergency, the investor can withdraw money from ELSS after three years.
PPF and ELSS both are distinct instruments. As far as returns are concerned, ELSS scores over PPF. Before investing in any of these instruments, the investor must consult a qualified financial adviser.
(By Abhinav Angirish, Founder, Investonline.in)