PPF: Secure savings, tax benefits.
ELSS: Higher returns, equity exposure.
Public Provident Fund (PPF) and Equity Linked Savings Scheme (ELSS) are both popular investment options in India, especially for tax-saving purposes. Here’s a comparison highlighting their key differences:
Public Provident Fund (PPF)
Nature of Investment:
- PPF is a long-term savings scheme with a fixed interest rate, backed by the government.
Risk:
- Low risk. Since it's a government-backed scheme, the returns are guaranteed and stable.
Returns:
- Returns are fixed and determined by the government, usually revised quarterly. Historically, it has been around 7-8% per annum.
Tax Benefits:
- Contributions up to ₹1.5 lakh per annum are eligible for deduction under Section 80C.
- Interest earned and the maturity amount are tax-free.
Lock-in Period:
- 15 years, with partial withdrawals allowed after 7 years under certain conditions.
Liquidity:
- Low liquidity due to the long lock-in period, though loans can be taken against the balance from the 3rd to the 6th year.
Equity Linked Savings Scheme (ELSS)
Nature of Investment:
- ELSS is a type of mutual fund that invests primarily in equities (stocks), offering the potential for higher returns.
Risk:
- High risk. Returns are market-linked and can fluctuate based on the performance of the stock market.
Returns:
- Historically, ELSS funds have offered higher returns compared to traditional fixed-income investments, but the returns are not guaranteed.
Tax Benefits:
- Contributions up to ₹1.5 lakh per annum are eligible for deduction under Section 80C.
- Gains up to ₹1 lakh are tax-free; gains above ₹1 lakh are taxed at 10% as long-term capital gains (LTCG).
Lock-in Period:
- 3 years, which is the shortest among all Section 80C investment options.
Liquidity:
- Higher liquidity compared to PPF due to the shorter lock-in period. Post the 3-year lock-in, investors can redeem their units anytime.
- PPF: Suitable for conservative investors looking for a risk-free, long-term savings option with assured returns.
- ELSS: Suitable for investors willing to take on higher risk for the potential of higher returns and with a shorter lock-in period.
The choice between PPF and ELSS depends on an individual’s risk appetite, investment horizon, and financial goals.
