Know exclusive details on two popular investment options PPF and ELSS. Checkout which is better : PPF or ELSS ?
What is PPF ?
PPF or Public Provident Fund is one of the most tax efficient instruments in India where people can deposit money for a fixed tenure and enjoy the returns over their investments.
You can open a PPF account in any nationalised or authorised bank/post office with an initial deposit of Rs.100 only but a minimum deposit of Rs.500 is required to be made during a financial year.The maximum limit of PPF account is Rs.150000 during a financial year.
There is no risk factor involved in PPF. You will get what you have invested along with the interest you have earned during the years of investment.The interest rate are fixed by the government every year.
The Interest on PPF for first 2 quarters of F.Y.2016-17 was 8.1% per annum. The PPF interest rate has been further reduced by 0.1 percent for the 3rd Quarter of F.Y.2016-17.So,the PPF interest rate for Oct’16 to Dec’16 is 8 % p.a.
PPF is a Long term Investment option.So,when you invest in PPF, you invest your money for a period of 15 years and complete withdrawal is possible only at maturity. Although,you can withdraw partially from Year 7 subject to certain conditions.
PPF is normally considered as one of the Best Long term Investment Options due to its EEE nature i.e.Exempt,Exempt and Exempt.
- Contribution or Deposit amount is Tax free U/s 80 C of The Income Tax Act.
- Interest earned is Tax free.
- Maturity/Withdrawal amount is also Tax free.
For a deeper insight on PPF as a long term investment you can refer : PPF Account,PPF Interest,PPF Rules – The Ultimate Guide !
What is ELSS ?
ELSS or Equity Linked Savings Scheme is also one of the popular Tax saving options. ELSS is a diversified equity mutual fund with a minimum lockin period of 3 years.
Investment in ELSS also qualifies for Tax Deduction U/s 80 C of The Income Tax Act.You can invest any amount in ELSS but the deduction can be claimed to a maximum of Rs.150000 only.
Further,no tax is levied on Capital Gain from ELSS in the long run. ELSS gives you the dual benefits of capital appreciation and tax benefits.Although,some risk is there,but based on historical data,ELSS usually performs well if you invest your funds for a longer duration.
Having a longer Investment horizon,you tend to get higher returns in ELSS, so it is amongst the best wealth creation techniques.
For details on ELSS go through ELSS or Equity Linked Savings Scheme -Things to Know !
PPF and ELSS are both good long term investment options.However,ELSS can yield better and higher returns in the long run.But,If you have surplus funds,you can include both of them in your investment portfolio.
There are few factors that might help you in deciding as to Which long term investment is better for you and why : PPF or ELSS,Let us discuss them to make things clear
PPF VS ELSS – Which is better ?
1. Lock in Period : In case of PPF the lockin period is 15 years or you can have partial withdrawal in the 7th year.But,in case of ELSS the lockin period is 3 years only.It all depends on your personal choice to extend it further.But,ELSS is considered a good tool for wealth creation in the long run i.e.you tend to reap higher benefits if money remains invested in ELSS for a longer period.
2. Rate of Interest : PPF amount yields a fixed rate of interest that is 8.1 % p.a. for the first 2 quarters and 8 % for 3rd quarter of financial year 2016-17.The rates are revised from time to time and normally range between 8-9% only.While in ELSS there is no such fixed rate of return,but normally you tend to get good returns if amount is invested for longer duration.
3. Tax Deduction U/s 80 C : Both PPF and ELSS are eligible for a tax benefit U/s 80 C upto a maximum of Rs.150000.If you invest in both PPF and ELSS you can claim a total deduction U/s 80 C for Rs.150000 only.This means there is no extra tax benefit if you invest in both.
4. Risk Factor : In PPF there is no risk attached,you will get the accumulated balance of your investment and interest thereon at maturity.But,in ELSS there is some risk involved and you cannot be sure about the returns.
So,keeping in mind all the above points,you can decide as to which option is the best for you based on your risk appetite and financial objectives.
PPF is considered as a safe investment option since the past few decades. People who are safe players and generally don’t want to take any risk and earn a fixed rate of interest accompanied with tax benefits opt to invest in it.
But,times are changing and investors are diversifying their funds by putting in other investment plans.Moreover,the reduction in interest rates of PPF(from 8.6% to 8.1% and further to 8% recently) also diverts investors to look into other options.
Moreover,if you have excess money,you can go in for both the options.
So,you can have a combination of both in your Financial Portfolio :-
- For stability and fixed returns – PPF and
- For Growth – ELSS.
Feel free to add any opinion or feedback on the topic that might be of help to some potential investor.
If you are thinking about tax planning, you may also like our post : 7 Tax saving tips for salaried class !
As the Govt., is very keen to bring the accrued interest of PF in the taxable income at the time of withdrawal/retirement, the accrued interest on PPF will also come under tax net in near future.
Hence, it is desirable to invest in ELSS as the lock in period is only 3years and Govt., has no plan of bringing the capital gains arising from the sale proceeds of ELSS under tax net.
Rightly said Sir…but we can at least enjoy the tax benefits on PPF till some rule for its taxation comes into force.Hope PPF remains in the EEE(Exempt) category,otherwise it will not remain an attractive option for the investors.
However,as you said ELSS seems to be a good option.It is best suited for the ones who can afford to take some risk and don’t want a rigid lockin period.
Moreover,the reduction in interest rates of PPF from 8.6% to 8.1% is also an additional point to be considered.