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. 

The government guarantees capital safety in PPF, which is appealing to risk-averse retail investors. However, investors should be aware that PPF has a lock-in term of 15 years and that premature closure is permitted 5 years after the end of the year the account was established. For the quarter of July 2022 to September 2022, PPF will continue to pay an interest rate of 7.1% per annum (compounded annually), which is higher than the current retail inflation rate of 6.71%. Historically, PPF has provided returns that have outperformed inflation and even outperformed bank fixed deposits. 

PPF interest rates are not fixed since they are based on quarterly revisions of the Government depending on the performance of bond yields. Due to the fact that liquidity is a key factor for debt investors, PPF account holders are allowed one partial withdrawal every financial year after five years, omitting the year the account was opened. After the PPF account reaches maturity after 15 years, the account holder has the option of extending the account further for 5 years, taking the maturity proceeds, or choosing to keep the maturity value in the account without making any additional deposits for which the prevailing PPF interest rate will be in effect.

Where to invest?

For investors who can’t figure out which one to choose ELSS or PPF for tax-saving purposes, Nitin Rao, Head Products and Proposition, Epsilon Money Mart said “Equity linked savings scheme (ELSS) is a type of mutual fund which offers benefit under Section 80C of Income Tax Act, 1961. A customer can get tax exemption up to INR 150,000 by investing in ELSS funds. ELSS has the shortest lock-in period as compared to all other investment options which provide tax exemptions such as PPF and so on. However, ELSS invests in the equity market, so the investor runs the market risk on his investment. Having said that, ELSS historically delivered better returns than any other conventional investment option such as PPF. On the other hand, PPF offers similar deductions under Section 80C of the Income Tax Act, 1961 but offers a fixed rate of return which is defined by the regulatory body. The lock-in for PPF investment is also on the higher side i.e. 15 years. The key benefit in PPF is that the interest received on the amount at the time of maturity is entirely tax-free.”

He further added that “Investors should invest in line with their risk profile and investment horizon. Both ELSS and PPF offer similar tax benefits, but the risk-reward matrix differs. An investor willing to participate in the equity markets and with a higher risk appetite should look at investing in ELSS and a conservative customer with a capital preservation objective should look at PPF investment.”

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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By fintax360

We Fintax360 team simplify finances and taxes for millions of Indian businesses and people. We educate them about finances, taxes and improve their relationship with money.

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