There are hardly any options that are better than tax-saving schemes when it comes to investing. Such schemes not only help individuals save tax but also fetch decent returns on investments.
Two of the most popular investment schemes are Equity Linked Savings Scheme (ELSS) and Public Provident Fund (PPF) as both offer better good long-term returns and tax benefits.
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Equity Linked Savings Scheme (ELSS)
The ELSS or Equity Linked Savings Scheme is the only kind of mutual funds that are covered under Section 80(C) of the Income Tax Act, 1961.
The scheme is popular as it has the shortest lock-in period among all tax-saving schemes under Section 80(C). It is mostly preferred by people with a higher risk appetite as a significant portion of ELSS goes towards equity investments.
Therefore, the returns on investment in this particular scheme are linked to the market. Investing in this scheme will earn you tax benefits under Section 80(C) of the Income Tax Act, under which contributions up to Rs 1,50,000 are exempt from taxation.
Experts say this is ideal for those who want to gain tax benefits as well as higher returns. They also have a much shorter lock-in period of three years, which can be extended further. However, the ELSS is not tax-exempt anymore as per guidelines issued in Budget 2018. It may be noted that a 10 per cent LTCG tax is applicable if the gains exceed Rs 1 lakh in a year.
Individuals who want to invest in ELSS should know that the risk involved is higher in comparison to a fixed deposit or PPF, but they offer much better returns.
Public Provident Fund (PPF)
The Public Provident Fund or PPF is one of the most popular investment options as they are not only exempt from taxation but also secure. All Indians are eligible to invest in this scheme except NRIs.
Investments towards the PPF can also be claimed as tax deduction under Section 80(C). It is worth mentioning that the PPF interest rate has been lowered sharply to 7.10 per cent this year due to the economic slowdown triggered by Covid-19 pandemic. Under the PPF scheme, you can invest between Rs 500 and Rs 1.5 lakh in a financial year.
The deposit can be made during a year at once or in monthly instalments, whichever you prefer. Investors in this scheme should note that it is a long-term scheme. While there is a provision to make partial withdrawals from the PPF account from the sixth year, the entire corpus can only be withdrawn after the maturity period of 15 years.
Investors should note that the mandatory lock-in period is 15 years, following which you can extend it for another five years. The interest you earn from this scheme, unlike the ELSS, is entirely tax-free.
ELSS vs PPF: Which one is better for you
It actually depends on the person and what kind of investment he or she is looking for. While both are excellent for tax saving, only PPF will provide an interest-free return. However, the lock-in period for PPF is much more than the initial three-year lock-in period for ELSS, which also offers higher returns on investment.
While the rate of return in ELSS is dynamic and depends on market performance, the performance of such hybrid schemes in recent years has not been up to the mark.
Furthermore, the risk involved with investing in ELSS is higher than that of PPF, which has a lower percentage of return. Factors such as how much risk you are willing to take are crucial in deciding which scheme to opt for.
Another point that can be considered is premature withdrawal. While PPF allows 50 per cent withdrawal of funds after five years, ELSS does not allow any partial withdrawals in between and you will have to wait three years for withdrawals.