The tax season is on, and most of you would be planning your investments in tax saving avenues to reduce your tax outgo. One of their preferred options is the public provident fund (PPF), whereby investors get a fixed interest rate (currently at 8%) for investing their money for an investment horizon of 15 years. But what if we tell you that the same money, if invested in an equity-linked savings scheme (ELSS) for a similar long duration, has the ability to generate relatively higher returns.
ELSS is a popular tax saving option under section 80C and has a statutory lock-in period of 3 years and up to Rs 1.5 lakhs can be invested in this scheme to qualify for tax deduction under section 80C of Income Tax Act.
Wealth Creation through ELSS
Every year the Government let us set aside some money into the PPF and we did so dutifully and gladly. A tax exemption became a ritual and a pleasant one at that – we were providing for our future. But what would have happened if we’d put this money to work in equity instead? We put this question to test by analyzing 20 years of data, ranging from 1999 to 2018. We analyzed two competitors of the PPF, Equity Linked Savings Scheme (ELSS) and a pure index investment.
For the sake of parity, we took the average returns of the ELSS category. So, we considered Rs1.5 lakh investment every year (making the total invested corpus Rs 30 lakhs), starting in 1999 and ending in 2018.
The return on PPF came out to be Rs. 77.8 lakh, while an investment in an ELSS fund would’ve added up to a whopping Rs. 2.3 crore, almost 3 times higher! Whereas, simply investing in the index would have given a decent return of Rs. 1.5 crore, which is almost double than PPF returns.
Map ELSS investments with your financial goals across life stages
The prime purpose of investing in ELSS is to reduce the tax outgo. But the corpus generated out of a prudent ELSS investment can also be used to fulfill key financial goals. Investors can sync their ELSS investments to attain goals across life stages such as building a retirement corpus, saving for their child’s education, buying a car or making a down payment for their house.
So, it is not a bad idea to get out of one’s comfort zone and explore the ELSS route for saving taxes and creating wealth.