PPF pays a fixed, tax-free 7.1% a year (the rate for October to December 2026) and locks your money for 15 years. ELSS is an equity mutual fund with a 3-year lock-in and no guaranteed return, and gains above ₹1.25 lakh a year are taxed at 12.5%. Both share the same deduction of up to ₹1.5 lakh a year under section 123 of the Income-tax Act, 2025 (old section 80C), but only if you file under the old tax regime.
The new regime is the default under the new Act, and it gives no section 123 deduction at all. So the tax-saving half of this comparison matters only to old-regime filers. For everyone else, it is a plain choice between a safe 15-year government deposit and a locked-in equity fund.
Who Still Gets the ₹1.5 Lakh Deduction?
Under the Income-tax Act, 2025, which applies from 1 April 2026, the new regime (section 202) applies unless you opt out. It computes your income without most Chapter VIII deductions, and section 123 is one of them. Your PPF deposit or ELSS investment then saves you no tax in the year you make it.
| Your situation | What ELSS and PPF do for you |
|---|---|
| Old regime, ₹1.5 lakh limit not yet used | Either one cuts taxable income. At the 30% slab plus 4% cess, the full ₹1.5 lakh saves up to ₹46,800 a year. |
| Old regime, limit already used by EPF, insurance, tuition fees or home-loan principal | No extra deduction. PPF still gives tax-free interest; ELSS is an ordinary equity fund with a lock-in. |
| New regime (the default) | No deduction. PPF keeps its tax-free interest and maturity. ELSS has no tax advantage over any other equity fund and still locks your money for 3 years. |
If you haven't picked a regime yet, do that first: our new vs old tax regime comparison for 2026-27 works through the break-even. Returns for FY 2025-26 (filed in 2026) still use the old Act, where the same ₹1.5 lakh limit sits under section 80C.
What Is PPF?
The Public Provident Fund (PPF) is a government small savings scheme with a 15-year term. The rate is reset every quarter by the Ministry of Finance. It has been 7.1% since 1 April 2020, and the office memorandum of 30 September 2026 kept it unchanged for 1 October to 31 December 2026. Deposits run from ₹500 to ₹1.5 lakh a financial year. Interest and the maturity amount are tax-free.
What Is ELSS?
Equity Linked Savings Schemes (ELSS) are diversified equity mutual funds with a statutory 3-year lock-in from the date units are allotted, the shortest among section 123 options. Returns follow the stock market and are not guaranteed. Long-term gains above ₹1.25 lakh a year (across all your equity funds and listed shares) are taxed at 12.5% under section 198 (old section 112A), plus 4% cess.
ELSS vs PPF: Head-to-Head Comparison
| Factor | PPF | ELSS |
|---|---|---|
| Returns | 7.1% for Oct–Dec 2026 (set quarterly by the government) | Market-linked, not guaranteed |
| Risk | Government-backed | Equity risk; can fall sharply in a bad year |
| Lock-in | 15 years, extendable in 5-year blocks | 3 years from allotment of each unit |
| Deduction (section 123, old 80C) | Old regime only, within ₹1.5 lakh | Old regime only, within ₹1.5 lakh |
| Tax on returns | Tax-free | 12.5% on long-term gains above ₹1.25 lakh a year, plus cess |
| Liquidity | Loan from 3rd to 6th financial year; partial withdrawal every year from the 7th | Full redemption once each unit's 3 years are up |
| Minimum | ₹500 a year | Usually ₹500 |
To run your own numbers side by side, with NPS added, use the ELSS vs PPF vs NPS calculator.
A 15-Year Worked Comparison with Tax Factored In
Illustrative example. You put ₹1.5 lakh in at the start of every year for 15 years, ₹22.5 lakh in all. PPF is assumed to stay at 7.1% throughout, which it may not. ELSS returns of 10% and 12% a year are assumptions, not forecasts, and real equity returns arrive unevenly. ELSS tax assumes the whole amount is redeemed in one year with no other equity gains that year.
| Instrument | Assumed return | Value after 15 years | Tax on exit | After tax |
|---|---|---|---|---|
| PPF | 7.1% | About ₹40.7 lakh | Nil | About ₹40.7 lakh |
| ELSS | 10% | About ₹52.4 lakh | About ₹3.7 lakh | About ₹48.7 lakh |
| ELSS | 12% | About ₹62.6 lakh | About ₹5.1 lakh | About ₹57.6 lakh |
If you are in the old regime, the deduction is the same for both, so it doesn't change which one comes out ahead. Spreading ELSS redemptions over several years uses the ₹1.25 lakh exemption more than once and lowers the tax. The equity gap only shows up if you stay invested through the falls along the way. At 7.1% the PPF figure is close to certain; the ELSS figures are not. Check PPF alone with the PPF calculator.
Who Might Lean Towards PPF?
- People who can't accept a fall in value, even a temporary one
- Old-regime filers in a high slab who want a guaranteed, tax-free return
- Savers who value a long lock-in as forced discipline
- New-regime filers who still want a tax-free, government-backed debt option (see PPF vs FD for how it compares after tax)
Who Might Lean Towards ELSS?
- Old-regime filers with a 7+ year horizon who can sit through equity falls
- People whose savings are already debt-heavy through EPF and PPF
- Anyone who wants a shorter lock-in than PPF's 15 years
Under the new regime, ELSS has no tax edge, and its 3-year lock-in becomes a cost. Our index funds vs ELSS comparison covers that trade-off.
Using Both
ELSS and PPF do different jobs, so many people hold both: PPF for money that has to be there, ELSS for money that can ride out equity swings. How you split them depends on your horizon, your other savings and how a 30% fall would affect you. FinPlann doesn't suggest a split; the calculator above shows how different mixes play out.
Don't Forget These Other Section 123 Items
Before adding PPF or ELSS, count what already uses your ₹1.5 lakh: your EPF contribution, home-loan principal repayment, children's tuition fees and life insurance premiums. Together these often use up most of the limit before you invest anything yourself.
The 3-Year Lock-in That Trips Up New Investors
ELSS has the shortest lock-in among section 123 options, but it is often misunderstood. Each SIP instalment has its own 3-year lock-in, counted from the date those units were allotted.
Example: you start a ₹12,500/month ELSS SIP in April 2026. The April 2026 instalment can be redeemed in April 2029, the May 2026 instalment in May 2029, and so on. Even if you stop contributing after 3 years, the last instalments stay locked for 3 years from their own dates.
Most investors choose the growth option. IDCW (dividend) payouts are taxed at your slab rate, while growth units are taxed only when you redeem.
PPF's Hidden Strengths Most People Ignore
- Loan facility. You can borrow against the balance from the 3rd to the 6th financial year.
- Partial withdrawal. From the 7th financial year you can withdraw part of the balance once a year, tax-free.
- Extension with or without contributions. After 15 years, the account can be extended in 5-year blocks with deposits, or kept open without deposits, earning the prevailing rate.
- Protection from attachment. The PPF balance is not subject to attachment under any court order or decree.
- Same rate everywhere. The government sets the rate, so it is the same at every bank and post office.
Common Mistakes in the ELSS vs PPF Choice
- Investing for a deduction you can't claim. In the new regime, neither ELSS nor PPF reduces your tax. Pick on returns, risk and lock-in alone.
- Picking on last year's return. An ELSS that did well last year may not next year, and the PPF rate can change any quarter. Decide on horizon and risk, not recent numbers.
- Not checking whether the limit is already used. If EPF, home-loan principal, insurance and tuition fees already reach ₹1.5 lakh, a new PPF deposit earns only its tax-free interest, not a deduction.
- Redeeming ELSS the moment the lock-in ends. Three years is short for equity. Getting out at the first chance often means selling into a dip.
- Treating ELSS as safe. It is equity. It can fall a lot in a bad year, as equity funds did in 2008 and early 2020. PPF can't.
The Final Word
PPF is for certainty and ELSS is for growth. In the old regime both earn the same deduction, so the choice comes down to risk and lock-in. In the new regime the deduction disappears, PPF is still a tax-free safe deposit and ELSS is an equity fund with a 3-year lock. More tax-year 2026-27 guides are in our mutual funds hub.
Rates and rules as of 24 October 2026. Examples are illustrative, not advice; FinPlann is not a SEBI-registered investment adviser.
Related Reading
- New vs Old Tax Regime 2026-27: Which Is Better for You? Your section 123 (old 80C) choice only matters in the old regime, so start by deciding which regime suits you.
