ELSS vs PPF: Which is a better tax-saving instrument under section 80C?

ELSS vs PPF: Which is a better tax-saving instrument under section 80C?

One of the most well-known and favoured tax deductions available to taxpayers is section 80C, which enables them to claim up to ₹1.5 lakh per year from their total taxable income by making investments that reduce their tax liability. Popular instruments include fixed deposits, Unit Linked Insurance Plans (ULIP), the National Pension Scheme (NPS), small savings schemes, and many others that can be invested under Section 80C. However, in addition to these schemes, Equity Linked Savings Scheme (ELSS) and Public Provident Fund (PPF) are the two most sought-after tax-related instruments. The rationale for this is that PPF is the only debt instrument with an exempt-exempt-exempt (EEE) status, whereas ELSS has the shortest lock-in period when compared to all other investment strategies that offer tax exemption under section 80C. Let’s take a quick look at which instrument you should choose as a taxpayer.

ELSS Funds
ELSS funds are nothing more than the flexi cap funds that fall under section 80C and enable tax deductions of up to ₹1.5 lakh annually. Considering that ELSS has the shortest lock-in period of 3 years under the tax-saving investment category, it is the most popular scheme among tax-savers. By investing in ELSS mutual funds, you can receive a tax benefit of up to Rs. 1,50,000 and save up to Rs. 46,800 in taxation annually if you fall into the highest tax bracket of 30 per cent.

ELSS funds produce returns by investing primarily in equity and equity-related instruments. As the funds invest across market capitalizations, including large, mid, and small caps, with 65% of the portfolio allocated toward equity, ELSS funds are also termed flexi cap funds, which are preferred the most by financial advisors for portfolio diversification to counter market volatility.

If investors hold onto their investments for the long term, ELSS mutual funds can provide returns that outpace inflation. Investors can invest in ELSS either in a lump sum or through Systematic Investment Plans (SIP) with as little as Rs. 500 per month. ELSS returns are based on how well the underlying securities perform, and the funds are benchmarked to the Nifty 500 TRI.

The fact that you can partially or completely withdraw your ELSS units after the three-year lock-in period is over, points to the liquidity of these instruments. In terms of tax treatment, capital gains from ELSS up to ₹1 lakh in a fiscal year are tax-free and capital gains over Rs. 1 lakh are subject to long-term capital gains (LTCG) tax of 10%.

The only government-backed debt instrument that qualifies for triple tax exemptions under Section 80C, or the exempt-exempt-exempt (EEE) status, is the Public Provident Fund (PPF). This suggests that the amount you invest up to Rs. 1,50,000 is deductible from your total taxable income, the interest you earn is tax-free, and the maturity amount you receive after 15 years lock-in period is also completely tax-free, making it one of the best tax-saving instruments for taxpayers…..Read More

Source By: livemint