Detailed Comparison Between EPF And ELSS

Equity Linked Saving Scheme or ELSS is a type of mutual fund scheme that primarily invests in the stock market or Equity. Investments of up to 1.5 Lac done in ELSS Mutual Funds are eligible for tax deduction under section 80C of the Income Tax Act. The advantage ELSS has over other tax Saving instruments is the shortest lock-in period of 3 years. This means you can sell your investment only after 3 years, from the date of purchase! However to maximise returns from ELSS funds, it is recommended to keep your investments intact for the maximum duration possible. If you have an ELSS SIP (Systematic Investment Plan), each instalment has a lock-in period of three years, which means each of your instalments will have a different maturity date.

Employee Provident Fund (EPF) is a retirement benefit scheme maintained by the Employees’ Provident Fund Organization (EPFO). The employee and the employer contribute to the EPF scheme on a monthly basis in equal proportions of 12% of the basic salary and dearness allowance. Out of the employer’s contribution, 8.33% is directed towards the Employee Pension Scheme.

Advantages Of An ELSS Fund

Here are some benefits of ELSS Funds: 

• Tax Savings

Amount invested in an ELSS fund is available for a tax deduction to the extent of ₹150,000 for the current financial year under section 80C of the Income Tax Act.This is the only scheme which allows investors to save on tax while earning high returns from investment in equity funds.

• Lowest Lock–in Period

ELSS has a lock-in period of only 3 years, as compared to minimum 5 years for other tax saving options. This period is the lowest in comparison to other tax saving options such as 15 years in a PPF or 5 years in a Fixed Deposit option. Thereby ELSS provides higher returns with the lowest lock-in period.

• The Benefit of Compounding

It is generally advised to invest in equity funds for a long time horizon, spanning 5-10 years. ELSS funds by virtue of the lock-in period bring about a disciplined long-term investment by default. In this process, it helps the investors benefit from the power of compounding in the long-run.

• Redemption Not Compulsory After 3 Years

If the investors are happy with the returns from the respective ELSS fund, they may choose to continue. Redemption is not compulsory after a period of 3 years. It is only a minimum investment duration, however, there is no maximum investment duration.

• Higher Returns

Since ELSS funds invest in equity schemes, the returns are higher (15-20%) compared to other tax saving options (generally, 7-10%).Over a 3 year period, the benefit of compounding coupled with returns from equity provides higher returns for investors.ELSS provides returns in the range of 15-20% generally. This is highest among other tax saving options such as PPF, FD over 5 years, among others.

• SIP Option Available

While investing in ELSS, investors may choose to go with the SIP option. It allows the investor to invest a fixed amount at regular/ periodic intervals. This allows the salaried class to invest a fixed sum from their savings periodically, generally each month.

What Are The Benefits Of EPF India Scheme?

The employees’ provident fund scheme extends an array of benefits towards the EPF employee members. It inculcates a sense of financial stability and security in them.

Here is a list of benefits that an EPF employee member can avail through the said scheme:

• Capital Appreciation

The PF online scheme offers a pre-fixed interest on the deposit held with the EPF India. Additionally, rewards extended at maturity further ensure growth in the employees’ funds and accelerate capital appreciation.

• Corpus for Retirement 

Around 8.33% of an employer’s contribution is directed towards the Employee Pension Scheme. In the long run, the sum deposited towards the employee provident fund helps to build a healthy retirement corpus. Such a corpus would extend a sense of financial security and independence to them after retirement.

• Emergency Corpus

Uncertainties are a part of life. Therefore, being financially prepared to face such unwarranted situations is the best an individual can do to deal with exigencies. An EPF fund acts as an emergency corpus when an individual requires emergency funds.

• Tax-saving

Under Section 80C of the Indian Income Tax Act, an employee's contribution towards their PF account is deemed eligible for tax exemption. Moreover, earnings generated through EPF schemes are exempted from taxes. Such exemption can be availed up to a limit of Rs. 1.5 Lakh.

The tax benefits applicable to the Employees Provident Fund scheme ensure higher earnings to the members. It further improves savings and an individual’s purchasing power in the long-term.

• Easy Premature Withdrawal

Members of EPF India are entitled to avail benefits of partial withdrawal. Individuals can withdraw funds from their PF account to meet their specific requirements like pursuing higher education, constructing a house, bearing wedding expenses or for availing medical treatment.

Conclusion

In comparison, ELSS offers higher returns than EPF. EPF is suited for individuals who are absolutely risk-averse and can afford a 15-year lock-in period. Investors who are willing to take a moderate risk to earn higher returns can opt for ELSS.

Also read: Differences Between EPF VPF And PPF

What Should I Choose - FD Or EPF?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.