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Is ELSS better than PPF and tax-saver fixed deposit?

Read below to understand which tax saving instrument is best for you.
Is-ELSS-better-than-PPF-and-tax-saver-fixed-deposit

Tax saving options to choose from:

Section 80C of the Income Tax Act provides a deduction from taxable income for certain investments and payments. Out of these, the three most popular investment products include ELSS, PPF, and fixed deposits. In this article, we will understand the features of these products, the tax benefits, the returns, and which one should an investor choose.

What is a Public Provident Fund (PPF)?

The PPF is a debt investment product provided by the Government of India. It is one of the financial products under the small savings schemes offered by the Government. An individual can open a PPF account with any post office, public sector banks, or specified private banks.

Tenure, contribution, and safety: PPF has a 15-year tenure. The account holder has to make a minimum contribution of Rs. 500 every financial year. The maximum contribution allowed is Rs. 1,50,000 in a financial year. PPF is one of the most secured investment products because it is guaranteed by the Government.

Interest rate: The Government declares the interest rate payable every quarter. For example, the interest payable for the quarter of April to June is declared at the end of the earlier quarter (by 31 March). So, PPF is a floating rate product.

Tax treatment: PPF enjoys the most favourable tax treatment. An investor gets a deduction from taxable income for the contribution (up to Rs. 1,50,000) made in a financial year. The annual interest (accrued and credited at the end of the financial year) is tax-free. The maturity proceeds are also tax-free. So, PPF enjoys the exempt-exempt-exempt (EEE) tax treatment. Hence, it is one of the most popular tax-saving products.

Many people invest in PPF to partially (as part of asset allocation) or fully achieve their long-term investment goals, such as building a fund for a child’s higher education or their own retirement.

What is a tax-saving fixed deposit?

The tax-saving fixed deposit is a debt product offered by banks and post offices. It has a five-year lock-in period. The account holder cannot make a premature partial or full withdrawal. Also, the account holder cannot get a loan against the security of the fixed deposit. The minimum amount is decided by the individual banks and usually starts from Rs. 1,000.

Tax treatment: The amount invested in a fixed deposit qualifies for deduction under Section 80C of the Income Tax Act. The maximum deduction allowed in a financial year is the amount deposit or Rs. 1,50,000, whichever is lower.

The interest rate is usually within the range of 5% to 9% p.a. depending on overall market interest rates. The interest amount is taxable. It is added to the overall income of the depositor and taxed at the individual’s slab rate.

What is an ELSS?

An equity linked savings scheme (ELSS) is an equity scheme offered by mutual fund houses. It invests a minimum of 80% of its total assets in equity and equity-related instruments. The scheme has a three-year lock-in which applies to lumpsum investments and each SIP instalment.

The returns are market-linked. While the ELSS scheme carries high risk, it has the potential to give inflation-beating high returns. Most individuals invest in ELSS for long-term financial goals such as accumulating money for a child’s higher education, own retirement, etc.

Taxation: The investment in an ELSS qualifies for deduction from taxable income under Section 80C of the Income Tax Act. While there is no limit on the investment amount, the maximum deduction allowed in a financial year is the amount invested or Rs. 1,50,000, whichever is lower. If the units are redeemed after one year, the profit is known as long-term capital gain (LTCG). In a financial year, the first Rs. 1 lakh LTCG is exempt. The incremental LTCG is taxed at 10% without indexation benefit.

PPF vs tax-saver FD vs ELSS: Comparison of features

Let us now compare the features of PPF, tax-saver FD, and ELSS.

FeaturePPFTax-saver FDELSS
Offered byPSU banks, specific private banks, and post offices on behalf of the Central GovernmentAll banks and post officesAsset management companies (AMCs)
Minimum investmentAn individual has to contribute a minimum of Rs. 500 every financial year.The individual banks decide the minimum amount. It usually starts from Rs. 1,000.The individual AMCs decide the minimum amount. It usually starts from Rs. 100.
Maximum investmentThe maximum contribution allowed in a financial year is Rs. 1,50,000.There is no limit on the  maximum amount that can be invested in a financial year.There is no limit on the  maximum amount that can be invested in a financial year.
TenureThe tenure is 15 years. On maturity, the amount can be withdrawn, and the account is closed. The individual has the option to extend the account in a block of five years at a time.The tenure is five years. On maturity, the bank pays the principal amount and interest (depending on the interest pay-out frequency chosen).There is no defined tenure. The investor can continue for as long as they wish. There is a lock-in of three years. Post the lock-in period; the investor can continue with or without additional contributions. Post the lock-in period; the investor can do a partial or complete redemption.
RiskVery low risk as it is guaranteed by the Government of IndiaLow risk. Up to Rs. 5 lakhs is insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) if the bank fails.Very high risk. The investor bears the investment risk. There is a possibility of making losses.
Taxation on maturity/redemptionThe maturity proceeds are tax-free.The interest earned is taxable. It is added to the individual’s overall income and taxed at the slab rate.Long-term capital gain (LTCG) tax is applicable on LTCG earned on the redemption amount. In a financial year, the first Rs. 1 lakh LTCG is tax-free. The incremental LTCG is taxed at 10% without indexation benefit.

PPF vs tax-saver FD vs ELSS: Comparison of returns

PPF interest rate

During the last five years (January 2017 – September 2022), the PPF interest rate has been in the 7.1% to 8% p.a. range. The current interest (September 2022) is 7.1% p.a.

Tax-saver FD interest rate

In the last five years, the 5-year tax-saver FD interest rate has been in the 5% to 8% p.a. range. The current (September 2022) interest rate on an HDFC Bank 5-year tax saver FD is 6.25% p.a. for senior citizens and 5.75% p.a. for other individuals.

The current (September 2022) interest rate on an ICICI Bank 5-year tax saver FD is 6.60% p.a. for senior citizens and 6.10% p.a. for other individuals.

ELSS returns

Let us look at the returns of the top five ELSS schemes in the last five years.

Performance of ELSS schemes

Scheme nameAUM (Rs. crores)1-year3-years5-years
Quant Tax Plan1,58419.77%44.57%24.03%
Canara Robeco Equity Tax Saver Fund4,1984.20%26.12%17.43%
Mirae Asset Tax Saver Fund12,6152.45%24.32%16.78%
Bank of India Tax Advantage Fund6081.45%28.88%16.17%
IDFC Tax Advantage (ELSS) Fund3,6929.95%26.73%14.72%

Note: The above returns are as of 08 September 2022. The returns are for direct plans with growth option. The one-year returns are absolute. The three and five-year returns are CAGR. The funds have been ranked based on five-year returns.

The above table shows the top five ELSS schemes have given five-year returns in the range of 14% to 24% CAGR. These are good returns and better than PPF and tax-saver FD.

PPF vs tax-saver FD vs ELSS: Which one is better for investment?

If we compare the returns of PPF, tax-saver FD, and ELSS, the returns of ELSS are superior. Also, ELSS has the lowest lock-in period of three years compared to tax-saver FD (five years) and PPF (fifteen years). However, in the short term, the risk of ELSS is high. So, if you have an aggressive risk profile with a long-term investment horizon, you may consider ELSS for investment. But, if you are a conservative investor, you may consider investing in PPF.

Investing in mutual funds with the Glide Invest App

In this article, we have discussed PPF, tax-saver FD, and ELSS, their features, returns, and which one is better for investment. You can partner with the Glide Invest App for your financial planning journey to get recommendations for the appropriate mutual fund schemes based on your risk profile. You will get advice on planning and systematically investing towards your financial goals

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To start investing towards your financial goals, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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