Two of the most popular 80C tax-saving investments are mutual funds and Public Provident Fund (PPF). PPF is a government-sponsored fixed interest rate scheme that has served generations. Alternatively, mutual funds are market-linked investment schemes that offer returns per underlying investments. However, a mutual fund scheme, specifically ELSS (Equity Linked Savings Scheme), has become a preferred investment choice for investors seeking high returns and tax benefits.
Here is why investment in an ELSS mutual fund is a superior choice over PPF:
What is ELSS?
ELSS or Equity Linked Savings Scheme is an equity mutual fund scheme that primarily invests in equity and equity-related securities across sectors and market capitalization. ELSS mutual funds have a minimum lock-in period of three years and offer tax benefits for investments.
You can invest in an ELSS via lump sum or a SIP (systematic investment plan). ELSS mutual funds offer market-linked returns based on your chosen investments. These schemes are subject to market volatility.
Why investment in ELSS is a better choice than PPF?
PPF is a government-backed, fixed-income scheme that offers a pre-determined rate of interest on savings. The investment tenure of a PPF is 15 years. The income earned and withdrawals at maturity from the PPF scheme are exempt from taxes. However, the restricted returns and long investment tenure make PPF a less favorable choice than an ELSS.
Here are some factors that justify why an ELSS is a better investment choice than PPF:
- Lowest lock-in period: All tax-saving schemes come with a lock-in period. However, ELSS has the lowest tenure of only three years compared to PPF schemes with a 15-year maturity period. ELSS mutual funds offer the highest liquidity among all 80C investments, including PPF.
- Better returns: ELSS mutual funds primarily invest in equity and equity-related securities that generate high returns. Historically, equity-linked investments have generated inflation-beating returns. An optimally diversified ELSS mutual fund portfolio can help accumulate a significantly large wealth corpus. Alternatively, in a PPF, your return is linked to government bond yields and is usually fixed for a long duration. The current PPF return is 7.9%, which is comparatively lower than ELSS and cannot offset inflation in the long run.
- Tax benefits: PPF is one of the most tax-friendly investment options under 80C with no taxes on earnings and withdrawals. Apart from PPF, ELSS offers significant tax advantages. Specific ELSS investments are tax-free. Capital gains from ELSS up to Rs. 1 lakh are free from taxes. Capital gains above Rs. 1 lakh are taxed at 10%. You can also use tax-loss harvesting strategies to reduce your tax bill.
- Liquidity: ELSS mutual funds are one of the most liquid investments in 80C. You can redeem your ELSS units fully or partially after the three-year maturity period expiry. If you want, you can continue your ELSS scheme without taking any withdrawals at maturity. In the case of PPF, your funds are locked in for 15 years. You can take partial withdrawals (up to 50% of the account balance) after seven years. However, you can take a loan against your PPF balance.
Overall, in terms of returns, the flexibility of investment, lock-in period, liquidity, and tax benefits, ELSS mutual funds are a superior choice over PPF. You can invest in an ELSS mutual fund through the Tata Capital Moneyfy app. The Moneyfy app also allows you to monitor and manage your mutual fund investments.