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ELSS and PPF are both considered to be great tax saving investments. While conservative investors invest in PPF, the aggressive investors pick up equity linked savings scheme (ELSS). ELSS funds are equity diversified mutual funds where investment can be done in lump sum or in SIP. Equity may said to be best performing investment over the long term.
ELSS schemes are known to give reasonable returns in long term. PPF currently offers an interest of 7.9% for the quarter January to March 2020. It is possible that PPF might give interest rate of 8% p.a. over coming years to beat inflation.
ELSS has a short lock in period of just 3 years as compared to the 15 year lock in period of PPF. Investor enjoy higher liquidity on ELSS schemes, which can be an advantage in a financial emergency. The public provident fund has a tax benefit where the invested amount gets a tax deduction u/s 80C up to ₹1.5 Lakhs a year. The interest earned and the amount withdrawn at maturity is also tax free.
Investor incur a long term capital gains (LTCG) tax @10% on ELSS capital gains in excess of ₹1 Lakh a year. Investor can invest amounts as low as ₹500 a month through SIPs in an ELSS scheme of your choice.
As we said, PPF currently offers an interest rate of 7.9% p.a. Let’s assume PPF offers this interest rate over the next 15 years. The returns from the ELSS depend on market performance. The table below shows returns on a ₹5,000 monthly investment in PPF and ELSS over a tenure of 3,5 and 10 years.
You see that Nifty 50 (ELSS) relatively give higher returns than PPF over a tenure of 3,5 and 10 years. As the Government has been consistently reducing the interest rates on small savings schemes like the PPF, ELSS can be seen as an great opportunity to save tax and generate wealth.