Why mutual funds are better than PPF for tax saving?

ELSS (Equity-Linked Saving Scheme) and PPF (Public Provident Fund) both account for deduction under section 80C of Income Tax Act with a maximum limit on deduction upto Rs. 1.5 lacs. So the question is where to invest to efficiently save taxes.

PPF is a product which was introduced by the Ministry of Finance in 1968 and is fully guaranteed by the Government of India. Apart from EPF (Employee Provident Fund) and ULIP (Unit-Linked Insurance Plan), PPF is the only product with EEE (Exempt-Exempt-Exempt) tax benefit. Wherein tax is not imposed on the principal, the interest and the total income from the product. This makes PPF a pure tax-free product. But there is no investment product which doesn’t have a downside and PPF is no different. PPF despite being a pure tax-free product and backed by the Government of India, it can only manage to avoid the credit default risk but is still exposed to interest rate risk. Also, PPF has a lock-in period of 15 years which is the longest lock-in period among different products which qualifies for Section 80C deductions.

ELSS, which also qualifies for deduction under section 80C, is a diversified equity mutual fund which predominantly invests in equity and equity-related securities. As it is not backed by the Government of India and invests in equity, ELSS is exposed to market risks and thus riskier than PPF. ELSS is an EET (Exempt-Exempt-Tax) product wherein, the principal and the interest is tax exempt, but the total income of the product is taxable. ELSS has a lock-in period of 3 years, which is lower than that of PPF and as ELSS predominantly invests in equities, its long-term returns would be comparably higher than those of PPF.