ELSS vs PPF: Your Best Investment for Section 80C Benefits

In the previous topic, we have learned about tax planning and tax exemption components to pay zero tax for 9 to 9.5 lakhs annual income. We all know that by Section 80C we can exempt our tax up to 1.5 Lakhs.

Here, we shall discuss, investing in such components with high lock-in periods, we must expect to beat the inflation and yield a minimum of 8% annual return.

With this objective, let us compare ELSS vs PPF by all their pros and cons and by the end shall learn how ELSS will surpass PPF by 70%.

Let us learn both of these investment portfolios in detail and finally, we can compare.

ELSS (EQUITY LINKED SAVINGS SCHEME):

ELSS is a type of Mutual fund, with a lock-in period of 3 years. This is the only difference from other actively managed mutual funds. ELSS, invested in equity mutual funds have a market – related risk. Return on investments is taxable if it is greater than 1 Lakh. ELSS is the only option where you can get a maximum reward as a return in tax exemption components with 10-16% per annum.

 FEATURES OF ELSS:

In ELSS, 80% of the amount is invested in Equity and the other 20% is invested in the equity-related instrument and cash components. 

FUND DIVERSIFICATION:

In spite of having to market risk, ELSS is as same as mutual funds, and the fund is allocated with a diversified portfolio of many sectors like Banking, FMCG, IT, Automobiles, Oil & Gas, and Pharma. The most important point to remember here is as per SEBI (Securities Exchange Board of India), any mutual fund should not hold more than 10% of its allocation over a single company shares.

Fund diversification will eventually lead to low risk in long term, since we do compare with PPF, which has to hold for 15 years, we hold ELSS for the long term for more benefits.

PAYMENT METHODS:

SIP (SYSTEMATIC INVESTMENT PLANS): You can start your investments in ELSS with a minimum of Rs. 500 as SIP. Investing every month will increase discipline in investing. This is an easy method to invest for beginners to invest in ELSS

LUMPSUM: You can invest the desired amount for investing in ELSS in a single Lumpsum shot too. This can be done at the time market in low value, for which you should have better market knowledge, to yield more capital gain.

THINGS TO REMEMBER WHILE INVESTING IN ELSS:

·       Even though it is an actively managed fund, choose Direct fund over Regular Fund(brokerage charges are included).

·       Analyse risk and reward before choosing a fund.

·       Select the fund which has the majority of shares in the Nifty Index.

·       Rather than looking for fund Star rating, look at funds diversification.

·       Don’t focus on funds with high return, look for 12-14% return per annum for 15 years.

·       Choose growth option as you will be carrying the fund for 15 years and compound interest works.

PUBLIC PROVIDENT FUND (PPF):

PPF is one of the options where most people use it as an option when it comes to the tax exemption component. There are some problems which we don’t understand while picking a PPF account;

·       The interest rate is not fixed as Fixed Deposit, it keeps on changing for every quarter by GOI.

·       The lock-in period is 15 years; in case of an emergency, we can withdraw the partial amount only after 7 years.

·       The current interest rate is 7.1%, earlier it was 7.9%. Once upon a time around the 2000s, it’s the rate was 11%. Nowadays, as the repo rate decreases, the interest rate of PPF also declines.

·       Low liquidity and it cannot be used for the short term.

·       In the long term investing, PPF will never beat inflation.

Advantages of PPF:

·       It can be initiated from our nearby post office and banks.

·       It can be started with a minimum amount of Rs. 500. To keep the account open we have to deposit a minimum of Rs. 500 every month.

·   Unlike SIP, we can deposit any amount of our desire, for every month but the minimum deposit should be Rs. 500.

·  Unlike SIP, it doesn’t require to deposit, on some particular date every month.

·       After 5 years, we will be eligible to take a personal loan with a lesser interest rate compared to bank personal loans.

·       If someone doesn’t care about inflation and fear taking market risk, can go for PPF rather than ELSS.

To find PPF’s historical interest rate, click here

COMPARISON OF ELSS VS PPF:

          In this agenda, we will be comparing ELSS and PPF in some important components like Returns, Risk, Beating Inflation, Liquidity, Tax on returns, rate of returns, Lock-in periods, etc. 

As we can use Rs. 1.5 lakhs as a tax exemption in Section 80C, we will be paying EPF which comes under 80C. Let us assume Rs. 30,000 is paid by EPF. So, for the remaining Rs.1.2 Lakhs of tax exemption is chosen as ELSS by an individual and another individual prefers PPF over ELSS as it has low risk. As the annual amount is Rs.1.2 lakhs, they are investing Rs. 10,000 every month.

Let us see, where these two people land up after 15 years in wealth gain.

PPF has earned a wealth of Rs.39.86 Lakhs

ELSS has earned a wealth of Rs.75.06 Lakhs, after deducting 10% tax, the total amount earned is Rs. 67.56 Lakhs, ELSS has surpassed PFF by 70% over a 15 years period and also beats inflation, which is the ultimate aim of investments. So from these analyses, it’s better to prefer ELSS over PPF when it comes to section 80C tax exemption.

PPF ACCOUNT HOLDERS – WHAT TO DO FURTHER:

Once you decide to move all your money to ELSS to get 80% more wealth gain, when compared to PPF but holds PPF, What to do next?

It’s not advisable to close the PPF account, as you will lose all the amount which you have invested earlier, just continue with a minimum amount of Rs. 500 and park all the remaining amount you consider for section 80C in ELSS.

KEY TAKEAWAYS – ELSS VS PPF:

·       PPF and ELSS, both are used as tax exemption components under Section 80C up to Rs. 1.5 Lakhs.

·       PPF has low risk, liquidity returns, and lock-in periods are about 15 years.

·       PPF should be availed by people who don’t care about Inflation and those who have fear of risk.

·       ELSS, it a type of an actively managed mutual fund with 3 years lock-in period.

·       As, we compare ELSS with PPF, which has 15 years lock-in period, ELSS will be considered to hold for 15 years and the expected return rate will be around 12-16% per annum.

·       There is a risk associated with ELSS as it is linked with the share market, but while holding for 15 years the risk will be minimized and the return will beat the inflation

·       The wealth gain by ELSS for 15 years will be 70% more than PPF.