Public Provident Fund vs ELSS: Which is a better investment option?

PPF offers an EEE (Exempt-Exempt-Exempt) tax status. It has a lock-in period of 15 years. The maturity amount and the overall interest earned during the period of investment are tax-free. ELSS, on the other hand, comes with a statutory lock-in of three years. It can be invested using both Systematic Investment Plan (SIP) and lump sum investment options.

Both PPF and ELSS are tax deductible up to the limit of Rs 1,50,000 under Section 80C of the Income Tax (I-T) Act.

Both PPF and ELSS are great tax saving options but have different investment objectives, say financial advisors.

According to Rachit Chawla, Founder and CEO, Finway, conservative investors opt for PPF, while aggressive ones pick up equity-linked savings schemes or ELSS. "An investor can invest in either of them based on the risk profile, which is the ability and willingness to bear the risk," he said.

investors also need to consider other factors such as rate of return, the investment horizon and liquidity/lock-in period before choosing between the two.

In words of Gautam Kalia, Head – Investment Solutions, Sharekhan by BNP Paribas - ELSS provides much better liquidity, the decision for the investor most often comes down to whether he or she wants a fixed return with low volatility or a potentially higher return with equity market linked volatility.

According to experts, PPF comes with low volatility and relatively lower risk at the cost of returns, which matches rate of inflation over time.

“While ELSS with its exposure to equity markets can potentially deliver a strong return whilst taking the risk of equity market investment,” explained Kalia.

For those individuals who want to get back their money quickly, ELSS is a more liquid option with only a three-year lock-in as compared to PPF where the earliest withdrawal option is after five years with a maximum withdrawal limit of 50 percent of the account balance.

According to Rachit Chawla, ELSS scheme can yield double-digit returns, which is higher than the returns from the PPF.  The investment in ELSS funds saves investor tax, as it comes with the advantage of a shorter lock-in period and professional fund management that leads to wealth accumulation.

"However,  long-term capital gains tax of 10 percent is also applicable on ELSS, if the capital gains exceed Rs 1 lakh a year. There is no benefit of indexation (grandfathering provisions for investments prior to January 31, 2018 are applicable),"  explained Alok Agrawal, Partner, Deloitte India.

PPF, on the other hand, is one of the most tax-efficient investment. In PPF, the interest earned is also non-taxable, and the maturity amount received after 15 years, is even tax-exempt.