PPF vs Mutual Fund (ELSS)

The article briefs about PPFand PPF vs Mutual Fund (ELSS).

What is an 80C deduction?

Section 80 C of the Income Tax Act, exempts certain investments and expenditures from being taxed. It allows deductions up to Rs 1,50,000, irrespective of your tax bracket. Small investments in savings schemes like PPF, Life Insurance, NSC, ELSS, Pension Plans and Infrastructure Bonds qualify for deduction under 80 C.

What is PPF?

PPF stands for Public Provident Fund. It has been introduced in 1968 for the aim to mobilize small savings into an investment with reasonable returns with additional benefits to save tax. It helps one build a retirement corpus. The current interest rate on PPF is 8% compounded annually. PPF is backed by the government of India and the risk involved is very minimal and it offers guaranteed risk-free returns. Also, it falls under EEE status which means that the amount invested, interest earned and maturity amount received are all tax-free.

PPF has a minimum tenure of 15 years which can be extended indefinitely in blocks of 5 years. Furthermore, the minimum investment in PPF account is Rs 500 and maximum is Rs 1,50,000. Investments can be made in lump sum or in a maximum of 12 installments. Deposits into a PPF account have to be made at least once a year for 15 years.

It’s easy to open a PPF account. All one needs is to submit an application form along with KYC, address proof, identity proof, and signature proof. A PPF account can be opened with a Post Office or any other nationalized banks. Some private banks are also authorized to help open PPF accounts. Amount invested in PPF account is locked in for 15 years. But there is an option to withdraw money from the start of the 7th year, after completing 6 years. One can withdraw the amount once a year.

 

How much to invest in PPF?

Though the upper limit of 80c investments is 1.5 lakhs, you should check how much you need to invest in PPF and also how much you can reduce in taxes with this investment. The minimum amount of investment is Rs 500 and maximum of Rs 1,50,000. Though PPF offers guaranteed returns, it isn’t advised to invest entire amount in this. This investment comes with a 15-year lock-in period.

Why invest in PPF?

PPF is the best option for investors who are looking for long-term investment, are risk averse and looking for guaranteed returns. For investors who are looking at higher returns are willing to absorb some risk can explore other options. PPF is tax efficient. It falls under the EEE status of 80C. The investment, interest and maturity amount is tax-free. Easy deposits can be made in 12 installments in a year. PPF offers flexibility in deposits.

 

Taking a loan on PPF

One can start taking a loan on their PPF from the 3rd financial year of opening their account. The loan can be availed up to the 6th financial year of opening the PPF account.

Another important thing to note is that the loan can be taken on 25% of the balance amount available in the previous year. The tenure of the loan is 36 months and it has to be repaid during this time. The interest on the loan is linked to the return on PPF. It is 2% more than the return on PPF. With the current rate of return being 8% the interest on PPF loan is 10%.

Withdrawal form PPF

A PPF account can be closed only upon maturity i.e. after 15 years. Upon maturity, the entire amount along with the interest earned can be withdrawn and the account can be closed. However, partial withdrawal from PPF account can be done every year from 7th financial year after opening the account. Hence the PPF amount can be withdrawn yearly on a regular basis. This withdrawal mustn’t exceed 50% of the balance at the end of the 4th year or 50% of the balance at the end of immediate preceding year whichever is less. One can keep infusing new investment even during withdrawal or loan period.

What are ELSS Mutual Funds?

ELSS Mutual funds stand for Equity Linked Savings Schemes. It is one of the best ways to save income tax. ELSS mutual funds are eligible for tax deductions under Section 80C. An investment of up to ₹1.50 lakh in ELSS can be claimed as a deduction from taxable income in India. They are diversified equity mutual funds that have a majority of its assets in equities. As per SEBI guidelines, ELSS mutual funds have to invest 80% or more of their assets in equities. ELSS mutual funds have a lock-in period of 3 years. If a lump sum amount is invested in ELSS mutual funds it is locked in for 3 years from the date of investment. If a SIP is done in ELSS, then each investment will be locked in for 3 years from the investment date.

PPF vs Mutual Fund (ELSS)

Returns of PPF are guaranteed by the government. When PPF was introduced it gave returns of 12% per annum. Now returns from PPF are 8%. Even with guaranteed returns, one cannot solely depend on PPF as an investment avenue as inflation will eat up the returns. For investors who are risk averse and looking for tax saving, PPF can be the best option. But for risk lovers, there are certainly other options to explore. The best among them is ELSS fund which also a tax saving investment option.

Returns from ELSS funds are market-linked and hence there are no assured returns. Yet, historically average ELSS funds have generated healthy returns of ~15% over the long-term while the good ones have given 20%! One can expect 12–15% returns from ELSS if remaining invested for 7–10 years.

Example 1

Mr. Anirudh has invested Rs 1,50,000 in PPF and his friend Ms. Annanya invested Rs 1,50,000 in ELSS. Both of them have stayed invested for 15 years. Following table shows the returns of both before and after inflation (4%) and tax.

 

 PPFELSS
Amount InvestedRs 1,50,000Rs 1,50,000
Tenure1515
Returns (%)8%13%
Maturity Amount (Pre Tax) (Rs)Rs 4,75,825Rs 9,38,141
Maturity Amount (Post Tax) (Rs)Rs 4,75,825Rs 7,54,326.9
Post Inflation Returns (Pre Tax) (Rs)Rs 2,70,142Rs 5,46,373
Post Inflation Returns (Post Tax) (Rs)Rs 2,70,142Rs 5,01,735.7

 

The returns are higher in case of ELSS both and after inflation and tax. Despite being subject to a tax of 10% on long-term gains, ELSS stands out as a clear winner.

Example 2

As you can also see in this image below, how 1.5 lakh invested annually in ABSL 96 Tax Relief ELSS fund for last 20 years compares with the same investment done in PPF. While ELSS investment grew to a massive ₹5.67 crores, PPF investment just grew to a mere ₹86 lakh!

 

 

Therefore, in the battle of PPF vs Mutual Fund (ELSS), let it be a lump sum investment or a SIP investment, returns from ELSS are higher which can beat inflation. ELSS funds don’t just beat PPF in returns but also on lock-in. ELSS funds have a lock-in of 3 years whereas PPF has 15 years. After 3 years there is no restriction on the withdrawal of the amount invested. Also, the investment in ELSS can be done by Indian citizens including NRI’s whereas only citizens of India can invest in PPF. NRI’s can’t invest in PPF.

 

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