One of the well-liked conventional 80C tax savings solutions in India is Public Provident Fund.The popularity of Public Provident Fund among tax payers can be attributed to a number of factors.The typical retail investor tends to be risk cautious, and the PPF programme from the government ensures capital safety.PPF maturity funds are completely tax-free, and generally, PPF rates of interest have been a few percentage points higher than the current bank fixed deposit rates.
- Over the past few years, mutual funds with equity linked savings schemes (ELSS) have become more and more well-liked among retail investors as tax-saving investments. Section 80C of the Income Tax Act of 1961 permits tax deductions for investments in ELSS, such as PPF. ELSS is linked to the market and vulnerable to market risks, unlike PPF, though.
- Three years is the shortest lock-in time among choices under section 80C and it applies to ELSS funds. With a partial pullout after 7 years, PPF has 15-year tenure.
- In essence, ELSS funds are diversified mutual fund equity schemes that make investments in equities and equity-related assets across industries and market capitalization ranges. Systematic Investment Plans or a lump sum investment can be made in ELSS by an investor.
Meaning of ELSS | Equity Linked Savings Scheme
- Only ELSS mutual funds are exempt from taxes under Section 80C of the Income Tax Act of 1961. The lock-in period for ELSS funds is the shortest of all Section 80C choices. People with higher risk tolerance, however, prefer it because it offers more potential for long-term wealth building.
- Equity investments make up a sizable component of the investment in ELSS, and performance is market-linked. As a result, the returns are based on market volatility. Long-term results have shown it to be profitable. Better returns than traditional vehicles like PPF and FD have been provided by the leading ELSS funds.
- Interest rates for PPFs are not fixed because the government can change them every quarter according on how bond yields are performing. Since liquidity is crucial for debenture holders, PPF depositors are permitted one partial withdrawal per fiscal year after five years, excluding the year that the account was opened.
- The PPF account holder has three options after the account reaches maturity after 15 years: extending the account for an additional 5 years, receiving the maturity proceeds, or deciding to keep the principal amount in account further deposits, in which case the current PPF interest rate will apply.
Differentiation | PPF v/s. ELSS
PPF Or ELSS Mutual Funds—Which Is Preferable?
- You have the power as a taxpayer and investor to choose your investment objective, financial strategy, level of risk tolerance, and, most crucially, the time frame you have available. Also keep the possibility of a premature withdrawal in mind.
- A partial exit window and the option to take out a loan are both provided by PPF if you need money throughout the investing period. After the five-year lock-in term, you can take 50% of the money or make a loan application in the third year.
- Partial withdrawals are not permitted during the lock-in period for ELSS, however. However, investing in ELSS has a 3-year lock-in period, whereas doing so in PPF has a 15-year lock-in period.
- As you may see, investing in a PPF is a comparatively safe choice. On the other hand, PPF gives significantly lower returns than ELSS over a longer period of time. PPF is more advantageous because to the tax advantages and capital protection; nonetheless, ELSS is unquestionably a choice for higher returns. Depending on your appetite for market volatility, you may or may not want to do this.
- The financial strategy and objective you have in mind, as well as the returns you are hoping to receive, should all be taken into consideration before choosing one or both solutions. Before selecting an investment, you might think about the distinctions between ELSS and PPF.
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