The Equity Linked Savings Scheme (ELSS) mutual funds and Public Provident Fund (PPF) are popular investment options that offer significant tax benefits. Choosing between both depends on your financial goals and risk tolerance.
However, if your primary goal is to maximise tax savings then it’s essential to assess the tax benefits available on investments in ELSS mutual funds and PPF.
What are ELSS mutual funds?
ELSS mutual funds predominantly invest in the stock market and your funds are allocated across various sectors in the equity market. This ensures considerable returns over time. They offer attractive returns due to the volatile nature of stocks and investors can consider investing in ELSS mutual funds to gain higher returns. Also, it’s an appealing investment option as it’s the only variant of mutual funds that offers tax deductions.
However, investors should also take note of the risks associated with them.
Advantages and disadvantages of ELSS investments
● Higher returns compared to other mutual funds with tax benefits.
● Tax deductions under the Section 80C of the Income Tax Act, 1961
● Short lock-in period of three years
● Professionally managed by expert fund managers.
● Subject to market risk
● Offers no security on investment like other invest options that are backed by the government.
What is the Public Provident Fund (PPF)?
The PPF is a financial instrument for savings that is backed by the Central government. It aims to leverage the potential of small savings by offering reasonable returns on investments. It is considered as a safe investment as it is backed by the government and there are negligible chances of losing one’s money. Currently, a PPF account is entitled to 7.1 per cent return on investment and it is credited to the account on an annual basis.
Advantages and disadvantages of PPF investments
● Safe investment option as it’s backed by the government
● Guaranteed returns on an annual basis
● Tax benefit under the Section 80C of the I-T Act.
● High lock-in period of 15 years
● Lower returns compared to ELSS mutual funds.
ELSS vs PPF: Tax benefits
Both ELSS and PPF investments are eligible for tax deductions under Section 80C. You can claim a maximum deduction of up to Rs 1.5 lakh in a financial year under these investments. If your investment in ELSS increases beyond this limit, you won’t get any tax benefit on the surplus amount. The returns generated from ELSS also attract Capital Gains tax.
On the other hand, in case of PPF investments the interest earned and the maturity amount are tax exempt. If tax-saving is your major concern, you can resort to investing in a PPF as it will also ensure safety of investments.