Many financial planners say PPF is a good option for risk-averse investors who want to combine long-term savings with tax savings
New Delhi: Products that are available for deduction from taxable income under section 80C include public provident fund (PPF), National Savings Certificate (NSC), fixed deposits and an equity-linked savings scheme – ELSS. Wealth managers believe choosing ELSS over other 80C products is more beneficial from a wealth creation perspective.
PPF is a government-backed investment scheme, and resident Indians can invest up to Rs 1.5 lakh a year, on which they can earn a guaranteed 8 per cent annual interest (this interest rate is fixed every quarter by the government). Many financial planners say it a good option for risk-averse investors who want to combine long-term savings with tax savings.
An ELSS mutual fund is a diversified equity mutual funds sold by asset management companies. With an ELSS, you can invest in equity and earn deductions up to Rs 1.5 lakh under Section 80C.
Here are a few pros and cons of investing in both these categories:
1) You can maximise your returns in the PPF account by investing early in the financial year in order to earn interest for the entire year. The minimum amount that must be deposited in a PPF account in a financial year is Rs 500 and the maximum allowed is Rs 1.5 lakh.
2) The minimum amount that a person can invest in an ELSS, to start with, is Rs 500 and there is no upper limit to investment. However, a maximum tax deduction of Rs 1.5 lakh, or the amount invested in the financial year, whichever is lower will be available on the investor’s income.
3) PPF has a 15-year tenure and thereafter it can be extended further in blocks of five years. PPF is worthwhile for long-term investment goals such as retirement, children’s education or buying a home. An account holder can make one withdrawal every year from the seventh year onwards.
4) ELSS has a three-year lock-in, the lowest of all tax-saving instruments, which makes it even more lucrative. Suppose you invested through a lump sum in an ELSS fund on February 1, 2019. You can redeem this investment fully on January 31, 2022.
5) The interest and maturity proceeds from PPF are exempted from tax. Long term capital gains from equity mutual funds, including ELSS funds, above Rs 1 lakh will be taxed at 10 per cent.
6) There are no risks in PPF, and it is guaranteed by the government. ELSS does not offer guaranteed returns, but it does offer market-linked returns. Returns in mutual funds are not guaranteed as they are linked to the stock market performance. However, ELSS is a better returning option with a shorter lock-in compared with PPF. ELSS has generated an annualised return of about 10 per cent, 16 per cent and 16.3 per cent per annum over the last 3-year, 5-year and 10-year periods.
7) Investors can invest in an ELSS through either a lump sum investment or through a Systematic Investment Plan (SIP).
8) If you want to avail a loan from PPF account, you can do so from the third financial year onwards. This facility is available till the fifth financial year and the loan can be taken once a year.