ELSS vs PPF - Key Differences and Which Is Better (2024)

Eligibility for ELSS

ELSS is open to all Indian residents, who have a PAN card and a bank account. Non-resident Indians (NRIs) can also invest in ELSS funds, subject to the Foreign Exchange Management Act (FEMA) regulations.

There is no age limit or income limit for investing in ELSS funds. You can invest in ELSS funds either as a lump sum or through a systematic investment plan (SIP).

Eligibility for PPF

PPF is open to all Indian residents, who have a valid identity proof and a bank account. However, NRIs and Hindu Undivided Families (HUFs) cannot open a PPF account. You can open only one PPF account in your name, either in a post office or a bank.

You can also open a PPF account in the name of a minor child, but the combined limit of Rs. 1.5 lakh per year applies to both the accounts.

Pros and cons of investing in ELSS vs. PPF

Here are some pros and cons on investing your money in ELSS mutual funds vs investing in PPF:

Pros of investing in ELSS:

• Shorter lock-in period of three years, which allows more liquidity and flexibility.
• Higher returns potential, as ELSS funds invest in equity markets, which can offer higher growth in the long run.
• Option to invest through SIP, which helps in averaging the cost of investment and benefitting from the power of compounding.
• Diversification of portfolio, as ELSS funds invest in different sectors and companies, which reduces the overall risk.

Cons of investing in ELSS:

• Higher risk and volatility, as ELSS funds are subject to market fluctuations, and the returns are not guaranteed or fixed.
• Taxed at 10% on long-term capital gains exceeding Rs. 1 lakh per year, which reduces the net returns.
• No premature withdrawal option, which means you cannot access your money before the completion of three years.

Pros of investing in PPF:

• Longer lock-in period of 15 years, which encourages long-term savings and discipline.
• Guaranteed and stable returns, as PPF offers a fixed interest rate, which is decided by the government every quarter, and is currently 7.1% per annum (Q3 of FY 2023-24).
• No market risk, as PPF is backed by the government, and the principal and interest are fully secure.
• Tax-free at all stages, as the interest and the maturity amount are exempt from tax, making it an EEE (exempt-exempt-exempt) instrument.

Cons of investing in PPF:

• Lower returns potential, as PPF offers a lower interest rate than ELSS funds, and may not beat inflation in the long run.
• Fixed by the government every quarter, which means the interest rate can change depending on the country’s economic situation and may not be favourable for the investors.
• No flexibility to change the investment amount, as PPF has a minimum and maximum limit of Rs. 500 and Rs. 1.5 lakh per year, respectively, and you cannot invest more or less than that.
• Partial withdrawal option only after seven years, which means you cannot withdraw your entire amount before the completion of 15 years, and only a certain percentage of the balance is allowed to be withdrawn after seven years.

How to invest in ELSS and PPF?

Investing in Equity Linked Saving Schemes (ELSS) and Public Provident Fund (PPF) involves straightforward steps. ELSS, essentially a mutual fund, qualifies for deductions under Section 80C. Various Asset Management Companies (AMCs) provide ELSS schemes, offering investors choices for tax-saving investments. On the other hand, PPF accounts, offered by banks, can be conveniently opened with the same bank where you hold your savings account, streamlining the investment process. Whether opting for ELSS or PPF, it's essential to explore different schemes, consider your financial goals, and make informed investment decisions.

PPF and ELSS - Which is a better investment option for you

The choice depends on your:

• Risk tolerance: Can you handle market ups and downs?
• Investment horizon: How long can you stay invested?
• Tax goals: Need tax breaks now or for future growth?
• Diversification: Looking to balance risk and reward?

Here are a few details about PPF and ELSS to help you decide:

• PPF: Offers guaranteed returns, tax benefits, and a long lock-in period (15 years). Ideal for risk-averse investors with long-term goals and a focus on security.
• ELSS: Invests in stocks, potentially offering higher returns but with market risk. Shorter lock-in (3 years) and tax benefits make it attractive for growth-oriented investors with a longer time horizon.

Conclusion

So, ELSS and PPF are tax-saving options with different advantages. ELSS might be better for those wanting higher returns & are willing to take more risk, whereas PPF provides stability and security for long-term savings. A smart investing choice could be to diversify your investment and get the best of both.

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