PPF or ELSS? How to aim for Rs 50 lakh by investing in both tax-saving investments

PPF vs ELSS Returns Comparison: Diversifying one’s savings in PPF and ELSS would serve the purpose rather than relying entirely on any one of them.

PPF or ELSS – Which is Better: Making a choice between ELSS and PPF has always been a concern with many taxpayers. Whether one should invest in equity-linked savings scheme (ELSS) mutual fund or in the public provident fund (PPF) remains a tough nut to crack for many especially when it comes to saving tax and investing for growth. First thing first – both of them represent different asset-class and hence any comparison between the two is not the right approach.

Why not to compare

While PPF is a debt asset generating returns with low volatility over the long term, ELSS is a market-linked equity investment exposed to the volatility of the stock market. Comparing returns generated by PPF or ELSS should be avoided as the underlying securities in both asset classes are inherently different, the return generated will also be different.

While both of them come with the tax benefit under Section 80C of the Income Tax Act, wherein a maximum of Rs 1.5 lakh can be invested to reduce the tax liability as per one’s income slab, the similarities end there. So, instead of making a choice between the two, one can make use of both of them in building up a corpus for the long term.

Diversify

Diversifying one’s savings in PPF and ELSS would serve the purpose rather than relying entirely on any one of them. Irrespective of varying interest rate cycles and markets seeing the lows and new highs over the previous decades, PPF remains an investment that cannot be shied away even by the millennials. PPF continues to benefit even the old-timers and may continue to benefit even the youngsters.

Illustratively, Out of the Rs 1.5 lakh Section 80C limit, if Rs 75,000 is invested in PPF for 15 years at an assumed growth rate of 7 per cent it will yield approximately Rs 20 lakh, while an equal amount in ELSS assuming a growth rate of 12 per cent over the same period will yield a little above Rs 30 lakh, close to Rs 50 lakh through tax-saving investments with half the risk involved!

Equities are supposed to be volatile and one of the ways to reduce its volatility is to hold them for a longer duration. While saving sin PPF may not be sufficient to create huge wealth over the long term, ELSS has the potential to generate high inflation return over the long term. Hence, do not look at the returns in ELSS after the lock-in ends but continue for longer-term without exiting.

PPF vs ELSS returns comparison

PPF currently is offering a return of 7.1 per cent return as compared to ELSS where the returns can vary a lot. Over the last 3 years, there are ELSS funds which have generated return between 7 per cent and a negative 11 per cent. Choosing the right ELSS scheme is equally important.

The rate of interest of PPF also varies but the volatility is not that much. The government sets the PPF rate at the start of every quarter of the financial year. Launched in 1968, PPF offered 4.8 per cent at that time and later on peaked at 12 per cent from 1986 to 2000. Still, interest earned being tax-free in nature and with annual compounding, its a dependable debt investment that one may go for.

PPF benefits

Few factors that make PPF a popular choice among long time investors are – Firstly, the interest earned in PPF is tax-free under Section 10 and does not add to one’s tax liability, and Secondly, the interest gets the benefit of annual compounding in PPF. This is how it works – Interest declared by the government gets added to the investment and then interest in future years interest is declared on the previous year balance. Simply put, in compounding interest is paid on interest, the impact of which is huge especially in the later years. Thirdly, the investment made and the earned enjoys the sovereign guarantee.

As a taxpayer

Estimate the amount of savings you need to do for tax saving. Based on your risk profile, you may divide the amount between the two. Your investments in PPF will reflect steady growth in the savings while the ELSS investments will take care of the inflation-adjusted goals through equity exposure over the long term.