PPF vs ELSS: Which is Better for Tax Saving?
A detailed comparison of PPF and ELSS for Section 80C tax saving. Understand returns, risk, lock-in periods, and taxation to choose the right option for your goals.
Both PPF and ELSS qualify for Section 80C deduction, but they couldn't be more different. One offers guaranteed returns with a 15-year lock-in; the other offers market-linked returns with just 3 years lock-in.
Which is better for you? Let's compare.
Quick Comparison
| Feature | PPF | ELSS |
|---|---|---|
| Returns | 7.1% (guaranteed) | 12-15% (historical average) |
| Lock-in | 15 years | 3 years |
| Risk | Zero | High (market-linked) |
| Tax on returns | Nil (EEE) | 12.5% LTCG above ₹1.25 L |
| Max investment | ₹1.5 L/year | No limit |
| Liquidity | Partial withdrawal from year 7 | Full after 3 years |
Returns: PPF vs ELSS
PPF Returns
PPF currently offers 7.1% annual interest, compounded yearly. This rate is set by the government and has remained stable for several years.
| Period | PPF Rate |
|---|---|
| Current | 7.1% |
| 5-year average | 7.1% |
| 10-year average | 7.9% |
| Historical peak | 12% (1999-2000) |
Calculate your PPF returns: Use our PPF Calculator to see exact maturity amounts.
ELSS Returns
ELSS funds invest in equities, so returns fluctuate with the market.
| Category | 1-Year | 3-Year | 5-Year | 10-Year |
|---|---|---|---|---|
| Best ELSS | 35% | 22% | 18% | 16% |
| Average ELSS | 25% | 15% | 14% | 13% |
| Worst ELSS | 10% | 8% | 9% | 10% |
| Nifty 50 | 20% | 14% | 13% | 12% |
Calculate your ELSS SIP: Use our SIP Calculator to project ELSS growth.
Long-Term Wealth Comparison
₹1.5 lakh invested annually for 15 years:
| Metric | PPF (7.1%) | ELSS (12%) | ELSS (15%) |
|---|---|---|---|
| Total invested | ₹22.5 L | ₹22.5 L | ₹22.5 L |
| Maturity value | ₹40.68 L | ₹56.61 L | ₹74.52 L |
| Wealth created | ₹18.18 L | ₹34.11 L | ₹52.02 L |
ELSS at 12% creates 1.9x more wealth than PPF over 15 years.
Risk: The Crucial Difference
PPF Risk: Virtually Zero
- Government-backed sovereign guarantee
- Principal and interest both guaranteed
- No NAV fluctuation
Worst case: Interest rate drops (has happened from 12% to 7.1% over decades)
ELSS Risk: Significant Short-Term Volatility
| Year | Nifty 50 Return | ELSS Impact |
|---|---|---|
| 2008 | -52% | Negative returns |
| 2009 | +76% | Strong recovery |
| 2020 | -38% (March) | Sharp decline |
| 2020 | +15% (full year) | Strong recovery |
| 2022 | -4% | Mild decline |
Worst case: 30-50% temporary loss (eventually recovers over 5-7 years historically)
Risk Profile Match
| Your Situation | Better Choice |
|---|---|
| Can't tolerate any loss | PPF |
| Need money in 3-5 years | PPF |
| Have 10+ year horizon | ELSS |
| Already have enough safe assets | ELSS |
| Close to retirement | PPF |
| Young with stable income | ELSS |
Lock-In: A Major Differentiator
PPF Lock-In: 15 Years
- No premature withdrawal until year 7
- Partial withdrawal (50% of balance) from year 7
- Full withdrawal only at maturity (year 15)
- Extension possible in 5-year blocks
ELSS Lock-In: 3 Years
- Each SIP installment locked for 3 years
- After 3 years, fully liquid
- No exit load
- Can withdraw anytime after lock-in
Practical Impact
Scenario: You invest ₹1.5 L/year for 10 years
| Year | PPF Available | ELSS Available |
|---|---|---|
| Year 3 | ₹0 | ₹1.5 L |
| Year 5 | ₹0 | ₹4.5 L |
| Year 7 | ~₹2.5 L (partial) | ₹7.5 L |
| Year 10 | ~₹4.5 L (partial) | ₹15 L (full) |
ELSS gives you full access to your money after 3 years—PPF doesn't.
Tax Treatment: PPF Wins
PPF Taxation (EEE)
| Stage | Tax |
|---|---|
| Investment | Deduction under 80C |
| Interest earned | Tax-free |
| Withdrawal | Tax-free |
Total tax: ZERO
ELSS Taxation
| Stage | Tax |
|---|---|
| Investment | Deduction under 80C |
| Returns during holding | Tax-free |
| Redemption (LTCG) | 12.5% above ₹1.25 L/year |
Example: ₹10 L gain on ELSS redemption
- Exempt: ₹1.25 L
- Taxable: ₹8.75 L
- Tax: ₹8.75 L × 12.5% = ₹1.09 L
Tax-Adjusted Returns Comparison
| Investment | Pre-Tax Return | Post-Tax Return |
|---|---|---|
| PPF | 7.1% | 7.1% |
| ELSS (12% raw) | 12% | ~10.5-11% |
| ELSS (15% raw) | 15% | ~13-13.5% |
Even after tax, ELSS beats PPF on returns if held long-term.
When PPF is Better
1. You Have Zero Risk Tolerance
If market volatility keeps you awake at night, PPF is for you. Guaranteed returns, no surprises.
2. You're Close to Retirement (5-10 Years)
With limited time to recover from market crashes, PPF's stability is valuable.
3. You Already Have Enough Equity
If your portfolio is 70%+ equity, PPF provides debt diversification.
4. You Want True Tax-Free Returns
PPF's EEE status means every rupee of return is yours. No LTCG calculations.
5. You Need Loan Facility
PPF allows loans from year 3-6 at 1% above PPF rate. ELSS has no loan facility.
When ELSS is Better
1. You Have 10+ Years Horizon
Over long periods, equity almost always beats debt. History supports ELSS for long-term goals.
2. You Want Liquidity
After 3 years, your ELSS money is fully accessible. PPF locks you in for 15 years.
3. You're Young (Under 35)
Time lets you ride out volatility. A 25-year-old has decades for market recovery.
4. You Want to Beat Inflation
At 6% inflation:
- PPF real return: 7.1% - 6% = 1.1%
- ELSS real return: 12% - 6% = 6%
ELSS actually grows your purchasing power.
5. You Want SIP Convenience
ELSS SIP aligns with monthly salary. PPF deposit is manual (though some banks offer auto-debit).
The Hybrid Approach
You don't have to choose one. Split your 80C allocation:
Conservative Mix (Low Risk Tolerance)
| Investment | Amount | Purpose |
|---|---|---|
| PPF | ₹1,00,000 | Stability, guaranteed returns |
| ELSS | ₹50,000 | Growth, liquidity |
Balanced Mix (Moderate Risk)
| Investment | Amount | Purpose |
|---|---|---|
| PPF | ₹75,000 | Debt allocation |
| ELSS | ₹75,000 | Equity allocation |
Aggressive Mix (High Risk Tolerance)
| Investment | Amount | Purpose |
|---|---|---|
| PPF | ₹50,000 | Emergency buffer, diversification |
| ELSS | ₹1,00,000 | Maximum growth |
Age-Based Recommendation
| Age | PPF Allocation | ELSS Allocation |
|---|---|---|
| 25-30 | 30% | 70% |
| 30-40 | 40% | 60% |
| 40-50 | 50% | 50% |
| 50-55 | 70% | 30% |
| 55+ | 100% | 0% |
As you age, shift from ELSS to PPF for stability.
Common Misconceptions
"PPF is Always Safer"
True for capital preservation. But inflation erodes PPF's purchasing power over time. ELSS volatility is short-term; PPF's inflation loss is permanent.
"ELSS Always Beats PPF"
Not in short periods. In 2008, ELSS lost 50% while PPF earned 8%. Over 15+ years, yes, ELSS typically wins.
"I Should Wait for Market Dip for ELSS"
Timing the market is nearly impossible. SIP into ELSS averages your cost over time—no timing needed.
"PPF Lock-In is Bad"
It's forced discipline. Many investors raid liquid investments during market panics. PPF's lock-in prevents this behavior.
Decision Framework
Answer these questions:
-
What's your investment horizon?
- Under 7 years → PPF
- 7-15 years → Mix
- 15+ years → ELSS-heavy
-
Can you handle 30% temporary loss?
- No → PPF
- Yes → ELSS
-
Do you need liquidity?
- Yes → ELSS (after 3 years)
- No → Either
-
What's your age?
- Under 35 → ELSS-heavy
- 35-50 → Balanced
- Over 50 → PPF-heavy
Conclusion
| Choose PPF If | Choose ELSS If |
|---|---|
| You want guaranteed returns | You want higher growth |
| You're risk-averse | You can handle volatility |
| You're close to retirement | You have 10+ years |
| You want true tax-free returns | You want liquidity |
| You already have enough equity | You want inflation-beating returns |
The best choice depends on your goals, timeline, and risk tolerance. For most young investors, ELSS offers better long-term wealth creation. For those needing stability, PPF provides peace of mind.
Consider using both—the diversification benefits outweigh the complexity.
Calculate your returns:
- PPF Calculator - Project your PPF maturity
- SIP Calculator - Plan your ELSS SIP growth