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What to Choose During Taxing Times

What to Choose during taxing times – PPF or ELSS?

Tax planning is the top priority for salaried professionals towards the last quarter of the fiscal year. Let’s consider two most popular instruments - Equity-Linked Saving Schemes (ELSS) the Public Provident Fund (PPF)

Understanding PPF and ELSS

PPF and ELSS both fall under Section 80C of the Indian Income Tax Act & allows investors to claim investments up to Rs 1.5 lakh as deductions on taxable income.

Mutual Fund - ELSS, predominantly invest in a diversified portfolio of stocks. Investors, choosing the dividend option, enjoy tax-free dividends and need not pay the long-term cpital gains tax when the investor sell units. In ELSS the minimum lock-in period of three years is the only caveat for investors to claim tax rebates on their income.

The government of India offers PPF as a small savings instrument via banks and post offices for the investors. Investors are assured a fixed rate of return & also the principal and interest amounts are not taxable at the time of withdrawal. The caveat for investors here is the 15-year lock-in period; however, investors can withdraw amounts partially, starting from the 7th year of starting investment in PPF account.

Table 1: Salient features

Tenure15 years3 years
Minimum investmentsRs.500Rs.500
Maximum investment amount for
deduction under Section 80C
Rs.1,50,000Rs 1,50,000
Taxation at time of redemptionTax freeTax free

*Interest rate as declared for the fiscal year 2018-19

1. ELSS: Offer higher real returns in the long run

As Compared to PPF, ELSS funds tend to generate higher return over the long term as the funds are managed by the fund managers actively and the investors money is invested in quities.

2. ELSS: Suits to investors with a longer investment horizon, higher risk appetite

Higher returns make ELSS funds look more attractive, there is a higher underlying risk associated with equities. Equity - as an asset class - tends to be volatile in the short-term, but its volatility subsides drastically if invested over a longer time-frame and hence offers better retuns.

Exclusive benefits of ELSS Funds

  • Lowest lock-in period of three years, As compared to all tax-saving instruments available under Section 80C (PPF – 15 years, NSC – 5 years, fixed deposits – 5 years)
  • ELSS offers Ability to provide regular cash flows via dividend option
  • ELSS Allows minimum investment of Rs 500, unlike regular equity-oriented funds, which have a minimum investment of Rs 5,000
  • ELSS offer Flexibility for one-time investment, unlike PPF, which requires least one contribution every year
  • ELSS Allows investors to opt for a systematic investment plan (SIP) which induces discipline and helps capture superior returns over the period of time.

Thus, investors investing with a long-term horizon & larger risk appetite must opt for ELSS Funds to save their tax outgo and parallelly generate superior returns.

Mutual Fund investments are subject to market risk and the Investors should consider their investment objectives and risks carefully before investing & must read all scheme related document carefully

MF Invest India is registered with AMFI under ARN code: ARN144789

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