When the financial year 2020-21 is coming to an end almost, many taxpayers try to indulge in last-minute investments for reducing their tax liability. They can try equity-linked savings schemes (ELSS) and public provident fund (PPF) are the most preferred tax-saving options.
Let’s compare ELSS and PPF by putting them in a different scenario. And find out which is better for income tax saving.
PPF is the safest tax-saving investment option. Because it is managed by the Government of India, both the principal and the interest component of PPF come with a sovereign-backed guarantee.
On the other hand ELSS funds primarily invest your money in shares, they are prone to the inherent volatility of equity markets. This means some risks can be mitigated by investing in ELSS through the SIP mode. SIP stands for systematic investment planning ensures regular investments at periodical intervals, which help in cost averaging during market corrections and, thereby, eliminate the need for market timing.
We should know that the interest rates of PPF do not remain fixed through its entire tenure. The Finance Ministry decides the interest rates of PPF along with other small saving schemes every financial quarter. The interest rates are set primarily based on government bond yields.
On the other side, the returns reproduced by ELSS schemes depend on the performance of their portfolio constituents. However, being equity-oriented schemes, ELSS funds can win against fixed income instruments in the long term by a wide margin.
The PPF comes with a lock-in period of 15 years and allows users to partial withdrawal and premature closure. The partial withdrawals are allowed only once a year starting from the seventh year of subscription. Premature closure is permitted after five years for reasons like treatment of life-threatening diseases of the account holder, dependent spouse or children or parents and funding higher education of the account holder or for any dependent children and in case of a change in residential status.
In ELSS you get a lock-in period of just three years, ELSS offers better liquidity compared to other Section 80C tax-saving investments.
In both ways, PPF and ELSS of up to Rs 1.5 lakh per financial year qualify for tax deduction under Section 80C. However, PPF has an advantage over ELSS in terms of taxation of returns.
For a PPF subscription, you need a minimum investment of Rs 500 per year during the entire subscription term. If you fail to pay, then a penalty of Rs 50 per year, apart from clearing the arrear of subscription money of Rs 500 per year. On the other hand, there is ELSS no such requirement of compulsory annual investment in the ELSS scheme. Investors can choose to stop or pause their SIPs any time whenever they want without incurring any penalty.