Both ELSS and PPF offer tax savings benefits under Section 80 (C) and offer good returns. Find out which investment option is best for you.
There are hardly any better options than tax savings plans when it comes to investing. Not only do these schemes help people save taxes but they also get adequate returns on investments. Two of the most popular investment schemes are the Equity Linked Savings System (ELSS) and the Public Provident Fund (PPF), both of which offer better returns and long-term tax benefits.
Equity Linked Savings Plan (ELSS)
A Stock-Related Savings Scheme, or ELSS, is the only type of mutual fund covered by Section 80 (c) of the Income Tax Act of 1961.
The system is popular because it has the shortest lock-in period among all tax saving schemes under Section 80 (c). It is mostly preferred by people who have a higher risk appetite, as a large portion of ELSS goes to equity investments.
Therefore, the return on investment in this specific scheme is related to the market. Investing in this scheme will provide you with tax benefits under Section 80 (c) of the Income Tax Act, under which contributions up to Rs. 1.50,000 are exempted from tax.
Experts say this is ideal for those who want tax benefits and increased profitability. They also have a much shorter lock period of three years, which can be extended further. However, ELSS is no longer tax-exempt under the guidelines issued in the 2018 Budget. It should be noted that a 10% LTCG will be applied if profits exceed Rs. 1 lakh in one year.
People who want to invest in ELSS should know that the risks involved are higher compared to fixed deposit or PPF, but they offer much better returns.
One of the most popular investment options is a Public Provident Fund or PPF, as it is not only tax-free, but it is also safe. All Indians are entitled to invest in this program except for non-resident Indians.
Investments in PPF can also be claimed as a tax deduction from Section 80 (C). Notably, the PPF interest rate has dropped sharply to 7.10% this year due to the economic slowdown caused by the Covid-19 pandemic. Under the PPF scheme, you can invest between 500 rupees and 1.5 thousand rupees in a fiscal year.
The deposit can be made for a year at a time or in monthly installments whichever you prefer. Investors in this plan should keep in mind that it is a long-term plan. While there is a clause for partial withdrawals from the PPF account starting in year 6, the full batch can only be withdrawn after the 15-year expiration period.
Investors should note that the mandatory closing period is 15 years, after which you can extend it for another five years. The benefit you gain from this system, unlike ELSS, is completely tax-free.
In fact, it depends on the person and what type of investment you are looking for. While both are beneficial for saving taxes, only PPF will provide an interest-free return. However, the lock-in period for PPF is much longer than the initial three-year reservation period for ELSS, which also provides a higher return on investment.
While the rate of return for ELSS is dynamic and dependent on market performance, the performance of such hybrid schemes in recent years has not kept pace.
Also, the risk of investing in ELSS is higher than that of PPF, which has a lower rate of return. Factors such as how much risk you are willing to take are crucial to determining which system you choose.
Another point that could be considered is early withdrawal. While PPF allows for 50% of funds to be withdrawn after five years, ELSS does not allow any partial withdrawals between them and you will have to wait three years for the withdrawal.