ELSS VS PPF Which is the best Tax-saving Investment Option for you?

“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it ” —   

Albert Einstein

Growth is needed in all walks of life. However, in case of inadequate growth and the in-availability of proper funds, there can be several hurdles to this growth.

Usually, people think that keeping money in a savings account is a way of saving funds and earning interest. However, saving money it in the 

“Savings Account”  might not be the best growth strategy for your funds. One needs to look at different Investment Options that can provide the needed growth. In this blog, we will glimpse over various investment options and compare 2 of the popular ones. A few of the Popular Investment Options in India are:

Mutual Funds

Mutual Funds -Mutual Funds are a popular investment option in India. There are several kinds of mutual fund investment options such as equity, debt, hybrid, solution-based schemes, index fund schemes, etc. In this, the Equity mutual funds primarily invest in stocks and have the potential to produce inflation-beating returns for a long period of time. These funds are High risk but with high risks come high rewards. A prevalent Rule-of-thumb that is often followed for investing in Equities is:

    100 - Your Age = Your Equity Investment Percentage out of the total portfolio

One can choose Mutual Funds only after checking the Fund Manager's Investment style. It is simple investing and one can start investing at as low as Rs. 500 p.m. through a Systematic Investment Plan (SIP). It also helps you average out the Purchase cost units over time. It can be tricky to decide which funds one should choose, in such a scenario it is advisable to seek professional expertise. Equity Linked Savings Scheme are a great option to invest in for tax-saving purposes.

National Pension Scheme

National Pension System is an investment scheme backed by the Government of India that is a great investment option for retirement years. The eligibility age has been recently increased from 65 to 70 years giving more opportunity to invest in NPS. A few months back, PFRDA had increased the maximum age of joining to 70 years and continue to defer their NPS Account till 75 years of age.

At maturity, you need to compulsorily invest 40% of the corpus accumulated at 60 years of age in the annuity plan. Another option is to avail tax benefit of up to Rs. 50,000 p.a. under section 80CCD(1B) of the Income Tax Act, 1961.The NPS scheme invests your money primarily under broader asset classes such as Equity, Government Securities, Corporate Bonds, and Alternate Investment Funds. An aggressive investor still in his prime can even choose to invest up to 75% towards equities. Hence, an opportunity to design your Portfolio and generate returns with National Pension System investment that can be availed even online.

Public Provident Fund

PPF is another option that is popular with risk-averse investors. It is a great Tax-saving investment option. PPF offers a lock-in period of 15 years and gives an option of extending your account in a span of 5 years. It is a great option for salaried people as it offers a greater interest compared to Fixed Deposits. For salaried individuals who often consider FD’s a great option, PPF is a great option and usually provides higher returns to FD’s. An amazing feature of FD’s is that it gives EEE tax benefit and a tax deduction of up to Rs. 1.5 lakh u/s 80 C of the Income Tax Act, 1961. A minimum of Rs. 500 p.m. needs to be invested in PPF.

So, above is a broad bifurcation of Investment categories where one can choose and invest. The past two years post the mar of the Pandemic have been extremely severe and have altogether increased a requirement of a better planning for the future to meet any exigencies. A survey conducted by YouGov.com shows the behaviour of India's urban population that is gaining confidence in the future post the Pandemic; however, it is still anxious on related to their current and future finances.

Source: https://in.yougov.com/en-hi/news/2021/06/28/urban-indians-think-covid-situation-india-improvin/

Nearly a third of respondents (31%) are prioritizing safeguarding their current holdings or investments. A quarter (26%) plan to increase their investments with minimum or no risk while a fifth plan to do so despite the risk involved (20%). Just as many (23%) have no particular investment strategy.

Though a certain percentage of the individuals are looking to begin or consolidate on their investments, there needs to a defined strategy to do the same. A great strategy to start with is investing in funds that will provide growth and tax efficiency.

Some of the Tax-Saving Investment options under 80C are:

ELSS- Equity Linked Savings Schemes (ELSS) are equity mutual funds that invest a large chunk of their accumulated corpus into equity instruments. ELSS mutual funds are the only financial schemes that can give you a tax rebate while allowing you to earn money

ULIPs- A ULIP is a blend of insurance and investment protection into a single investment plan. A ULIP does not offer a fixed rate of interest.

NPS- The National Pension Scheme (NPS) is an Indian government-run programme for subscribers to provide retirement benefits. On average, NPS offers a 9–12% interest rate per annum on the contributions made for the current fiscal year.

PPF- A PPF is a government-sponsored investment plan that allows for long-term savings. Contributions made to PPF are tax-deductible, and the lock-in period is 15 years.

SSY- The Sukanya Samriddhi Yojana is a government savings scheme aimed at promoting girl child development through building a corpus for future finances and development. The rate of interest offered for Sukanya Samriddhi Yojana for the current financial year is 7.6%.

NSC- A National Savings Certificate is an investment certificate that is issued by the post office. The NSC scheme offers a guaranteed return on investment and also offers savings in income tax. The rate of interest offered under NSC for the current financial year is 6.8% per annum

Tax-saving FDs - These are favoured by risk-averse investors seeking assured profits. Fixed-income investments (FDs) have fixed gains since they pay the same interest rate during their entire term.

EPF- It is a government-sponsored savings plan aimed at organized-sector employees. 

We will discuss two investment options, ELSS and PPF, in-depth and know all about them.

Equity Linked Savings Scheme

An equity-linked savings scheme is a mutual funds scheme that is eligible for tax deductions under section 80c of the Income-tax Act, 1961. Therefore one can claim a tax rebate of up to Rs. 1,50,000 under section 80 c of the Income Tax Act.

ELSS funds have several advantages over many other tax-saving schemes. ULIPs and NPS are the other two popular schemes that give equity returns. However, ULIPs have a lock-in period of five years, high costs, and less transparency, and NPS, though a great product, is majorly is best focused on the Retirement years. ELSS stands out as a unique investment option that can provide several benefits.

Let’s look at some of the advantages of ELSS Mutual Funds

1. Tax Saving

Equity Linked Savings Scheme Funds are an investment option qualifying for tax deductions. One can avail tax-deduction up to Rs. 1.5 lakh p.a. under section 80C of the Income-tax act, 1961. Even if you decide to choose the new tax regime where there is long-term capital gain from ELSS above Rs. 1 lakh is taxable, these funds are amongst the best tax saving options and may also provide higher post-tax returns than other ULIPs or Provident Provident Fund (PPF).

2. Short Lock-in period

The ELSS has a minimum lock-in period of three years which is comparatively shorter than Public Provident Fund, Employee Provident Fund, and National Savings Certificate schemes which have a minimum of 5 years lock-in period.

3. An option for Higher returns

Though the growth is expected in the initial years as well , the investment has the capacity to yield higher returns if invested for a longer period of time. With a long-term time horizon, the power of compounding works on the investment  and can give a formidable corpus over a span of 10 years or more.

4. Develops a habit of saving

Equity Linked Savings Schemes can be taken with a SIP option and one can choose to start at as low as Rs. 500 p.m. Gradually the SIP investment can be increased to create a formidable corpus ,thus inculcating a habit of regular savings.

PPF ( Public Provident Fund)

Public Provident Fund is a Govt. backed scheme that encourages the people to make provisions for old age and secure their retirement. A joint PPF account can also be opened for a minor with a parent or legal guardian.

Things to know about PPF

• Tax benefit- One can claim a deduction of Rs. 1,50,000 p.a. u/s 80C of the Income-tax act, 1961 for investments made to your Public Provident Fund. Also, the interest received on the amount at maturity is completely tax-free.
• Nomination- A nomination can be made in the PPF account. In case of no nominations, the legal heir gets the accumulated amount in his account if the account holder dies.
• Interest Rate- The current interest rate for Public Provident Fund is 7.1% p.a.
• Number of PPF accounts -There can be only one PPF account on your name ( includes joint accounts)
• Flexible Payment mode - You can select to contribute to your Public Provident Fund account either in installments or lump-sum annually.
• Investment amount - The minimum investment amount is Rs.500, and there is no limit to the maximum investment amount.
• Lock-in period- The mandatory lock-in period for PPF is 15 years.       

ELSS Funds, a better option for Investment growth over PPF.

       ELSS and PPF are two popular investment options that investors often choose. Though PPF is a good option with tax benefits and government backing, it comes with a stringent lock-in period and a fixed rate of return (regulated by the government for each Financial Year) that might not be suitable for an investor looking for fast growth and wealth creation. The below table shows the comparison between two investment options. Choosing ELSS can be a great option for building a corpus.

TOP 10 ELSS Schemes are:

Key takeaways so far:

1. Ample financial security is needed in all stages of life to fulfill dreams.

2. Putting your money to work through prudent investing is a way to sustain and grow your corpus.

3. One can choose the investment option as per the risk appetite, goal, and time horizon in-hand

4. ELSS as an Investment option can be a great option giving growth with tax benefits and not a stringent lock-in period.

5. Usually, 12-14% return on an average is expected out of an ELSS investment.

6. These funds are managed by professional fund managers who can gauge the market swings and manage the investment in the most growth-oriented options. 

7. One can avail tax rebate of up to 1,50,000 under section 80 of the Income-tax act 1961.

8. Investing into mutual funds is super easy, convenient, and completely paperless with onlinemf.bajajcapital.com

9. Seeking professional advice can be a good option when going for the investment to ensure the right options are chosen as per your individual needs.

Furthermore, investment growth is the ultimate aim for all investors. PPF is a good option for an investor with minimal bandwidth of risk and can settle with a fixed set of returns. On the other hand, Equity Linked savings scheme can be a more suitable option for an aggressive and high-growth-oriented investor.