In India, the main reason why we invest is simple- we want to pay less tax. Investing for the future is often not a priority especially if you are young and thus Section 80C of the IT Act is often the be all and end all of your investment alternatives. The key tax saving options available under that specific section includes PPF (Public Provident Fund), ELSS (Equity Linked Savings Scheme) mutual funds, bank tax saver fixed deposits, National Pension Scheme (NPS) and many others.
In the past few years, ELSS mutual funds have emerged as a popular investment choice among many investors, but the old and trusty PPF still scores high especially among the risk-averse. Though the tax saving features of both these instruments is the same, in many ways, ELSS is a better option from the investor’s perspective and in the following sections, we will discuss why.
Shorter Lock-in Period
For starters ELSS has the shortest lock-in period (3 years) among all available 80C instruments PPF included. Thus, if you choose to do so, you can liquidate your tax saving mutual fund investment after completing the 3 year lock-in period. In case of PPF, the lock-in period is 5 years, but you can only make partial withdrawals from the 6th year onwards. Complete withdrawal of your deposits plus interest is allowed only after 15 years.
Greater Flexibility
In case of ELSS after completion of the 3 year lock-in period, it is not mandatory to cash out (unlike the popular myth!). you can continue to stay invested in the scheme for any duration you want. Apart from a lump sum withdrawal option, you also have access to unique options such as transferring to a different scheme through a STP (systematic transfer plan) or you can withdraw bit by bit through a systematic withdrawal plan (SWP). In case of PPF, once your account is 15 years old, you have the option of either withdrawing the amount or keeping your account operational for additional blocks of 5 years each time. Though you are free to make withdrawals during the extended period without further investments, such withdrawals are allowed only once each year.
Higher Returns over the Long term
Where ELSS truly scores over PPF is the high ROI that tax saving mutual funds offer. Historically, ELSS have provided returns that are around 15% annually, while the interest rate offered on PPF deposits have declined constantly over the past few years and the current rate stands at 8%. The following is an illustration of how your monthly investment of Rs. 10,000 of will grow in case you invest in a tax saver mutual fund (ELSS) offering a ROI of 15% as opposed to a PPF account that offers 8% .
Table 1. ELSS vs. PPF head to head – How your money grows*
| Number of Years | Amount Invested (Rs.) | Value of ELSS Investments @ 15% (Rs.) | Value of PPF investments @ 8% (Rs.) |
| 1 | 1.2 lakhs (Rs. 10, 000 per month x 12 months) | 1.3 lakhs | 1.25 lakhs |
| 2 | 2.4 lakhs | 2.81 lakhs | 2.61 lakhs |
| 3 | 3.6 lakhs | 4.57 lakhs | 4.08 lakhs |
| 4 | 4.8 lakhs | 6.6 lakhs | 5.67 lakhs |
| 5 | 6 lakhs | 8.97 lakhs | 7.40 lakhs |
| 10 | 12 lakhs | 27.87 lakhs | 18.42 lakhs |
| 15 | 18 lakhs | 67.69 lakhs | 34.85 lakhs |
*The ROI in case of both ELSS and PPF have considered constant at 15% and 8% respectively, however, they are liable to change as per market requirements and government regulations.
As you might have gathered from the above table, the higher ROI offered on average by an ELSS fund can make your investment grow much faster in the long term as compared to lower ROI instruments such as PPF. This is perhaps the key criteria where ELSS emerges as a clear winner against PPF in case you are planning to invest for the long term as in the case of retirement planning.