Insights

Budget 2018 impact – Why ELSS still scores over PPF

March 12, 2018 . Gourav Kumar

After the 2018 budget imposed a 10% tax on long-term capital gains from equity last month, there was a debate whether ELSS still remains the best investment option to save on taxes. From a tax treatment point of view, Public Provident Fund (PPF) may now appear more attractive given that its income is tax free, while the gains from ELSS funds will become taxable. Let us look at the returns to see if PPF can beat ELSS on a post-tax basis.

To do this comparison, we assumed an investment of Rs. 50,000 made at the beginning of each financial year, starting 1st April, 2012. The investments were made in ELSS funds as well as PPF. So as to not get biased by the fund selection, we selected two funds, Franklin India Taxshield, one of the top rated funds, and HDFC Tax Saver, a bottom-quartile fund.

We then looked at the value of the investments after tax at the end of 5 years. We also looked at the returns generated by these investments. This is how much your investments would have returned:

Returns_of_PPF_Vs_ELSS_funds

 

As you can see, even a mediocre-performing fund convincingly beat PPF as an instrument.

We further varied the start date of the investments, and looked at the value of Rs. 50,000 invested at the beginning of each year for the next 5 years. This removes any bias due to market cycles. We then looked at the post tax returns given by the above three instruments. These are the returns that you would have got.

In the above graph, the yellow line tells you how PPF compared with ELSS funds. The line fails to go above the columns 9 out of the 10 times. Again, the post tax returns of both the funds consistently beat the returns given by PPF.

What about the returns of the investment starting in January 2004? The value of these investments is as of 31st March 2009. This date was pretty close to the time when the markets bottomed out after the crash due to the 2008 subprime crisis. Continuing to invest would have pulled up your returns above PPF in two more years.

Apart from higher returns, ELSS funds also enjoy a shorter lock-in period of 3 years (15 years for PPF) and LTCG exemption up to Rs. 1 Lakh which sweeten the deal further.

The return charts above simply tell you that PPF may be a safe option but not anywhere close to delivering superior returns like ELSS. If you have a time frame of 5 years or above, there is every reason for you to choose ELSS over PPF, even post the tax imposed in the recent budget.

Get FundsIndia’s articles delivered straight to your inbox!

Enter your email address to get:

  • Mutual fund recommendations from experts
  • Buy, hold or sell calls for stocks
  • Investment tips and tricks
  • All the latest news from Fundsindia.com

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.