Take your pick during taxing times – PPF or ELSS?

Tax planning tops the list of to-dos for salaried professionals towards the last quarter of the fiscal. Let's consider two popular instruments - Equity-Linked Saving Schemes (ELSS) the Public Provident Fund (PPF) - in this article. While ELSS funds are found attractive, given their propensity to generate higher inflation-adjusted returns over the longer run, PPF seems a safer bet for the risk-averse investors.

Understanding PPF and ELSS

PPF and ELSS fall under Section 80C of the Indian Income Tax Act, which allows investors to claim investments up to Rs 1.5 lakh as deductions on taxable income.

Here come the finer aspects …

Mutual funds, offering ELSS, predominantly invest in a diversified portfolio of stocks. Investors, choosing the dividend option, enjoy tax-free dividends and need not pay the long-term capital gains tax when they sell units.  The minimum lock-in period of three years is the only caveat for investors to claim tax rebates.

The government offers PPF as a small savings instrument via banks and post offices. Investors are assured a fixed rate of return; also, the principal and interest amounts are not taxable at the time of withdrawal. Like in case of ELSS, the caveat here is the 15-year lock-in period; however, investors can withdraw amounts partially, starting from the 7th year. 

Table 1: Salient features

Criteria PPF ELSS
Tenure15 years3 years
Returns8.70%*Market-linked
Risk Low High
Minimum investmentsRs.500Rs.500
Maximum investment amount for deduction under Section 80CRs.1,50,000Rs 1,50,000
Taxation at time of redemptionTax freeTax free

*Interest rate as declared for the fiscal year 2015-16

  1. ELSS: Higher real returns in the long run

Compared with PPF, ELSS funds tend to generate a higher return over the longer term, as funds are managed actively and invested in equities. ELSS funds – represented by the CRISIL-AMFI ELSS Fund Performance index –have given 15% annualised returns, over the last decade ended Oct 30, 2015 compared with an average return of 8% offered by PPF.

Thus, ELSS gives investors an opportunity to earn a higher inflation-adjusted return or real return. Chart 1 depicts the comparative returns from ELSS and PPF on a sum of Rs 1000 invested in 2004-05. While the sum invested in ELSS funds (represented by the CRISIL-AMFI ELSS Fund Performance Index) has grown to Rs 5,460 at the end of FY15, that in PPF has risen to Rs 2,215.   

Chart 1 – Returns of ELSS and PPF vs average inflation rate

Take-your-pick-during-taxing-times-PPF-or-ELSS.jpg

Source: Financial website, CRISIL Research and CRISIL Database

  1. ELSS: Suits those with a longer investment horizon, higher risk appetite

While higher returns make ELSS funds look more attractive, there is a higher underlying risk associated with equities. While equity - as an asset class - tends to be volatile in the short-term, its volatility subsides drastically if invested over a longer time-frame (see Chart 2).

Chart 2: Long term trend is positive despite sporadic volatility

Exclusive benefits of ELSS

  • Lowest lock-in period of three years, amidst all tax-saving instruments available under Section 80C (PPF - 15 years, NSC - 5 years, fixed deposits - 5 years)
  • Ability to provide regular cash flows via dividend option
  • Allows minimum investment of Rs 500, unlike regular equity-oriented funds, which have a minimum investment of Rs 5,000
  • Flexibility for one-time investment, unlike PPF, which requires least one contribution per year
  • Allows investors to opt for a systematic investment plan (SIP) which induces discipline and helps capture superior returns
Take-your-pick-during-taxing-times-PPF-or-ELSS1.jpg

Source: Financial website,  2015* - Returns are as on Oct 30, 2015

Thus, investors having a long-term horizon and larger risk appetite can opt for ELSS funds to save on their tax outgo and simultaneously generate higher returns.

Thus, in a nutshell, both ELSS and PPF are viable alternatives in terms of tax benefits. While ELSS has the lowest lock-in period, among all tax saving options under section 80C before investing in ELSS funds, investors must evaluate the scheme's track record during good and bad times, look for experienced fund managers, and choose fund houses with good investment management practices and client-servicing capabilities. On the other hand, while PFF can turn unviable in a higher inflation scenario, it is ideal for risk-averse investors.

Please consult your financial advisor for more details on ELSS Funds.

Disclaimer : Any information contained in this article is only for informational purpose and does not constitute advice or offer to sell/purchase units of the schemes of SBI Mutual Fund. Information and content herein has been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. Investors should consult their financial advisers before taking any investment decision


Mutual Fund investments are subject to market risks, read all scheme related documents carefully​

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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