Among all the safe and sound investment options in India, Fixed Deposits (FDs) and the Public Provident Fund (PPF) are among the most popular investments. Both are safe instruments but are employed for various financial goals and provide various features. Understanding where the two diverge can help you decide where you ought to invest based on your time horizon, liquidity needs, and tax-saving needs.
What is a Fixed Deposit (FD)?
A Fixed Deposit is a bank and NBFC offering in which you invest an amount of money for a specific term at a specified rate of interest. FD rates of interest range between 6% and 8% based on the bank and duration. FDs are flexible—7-day to 10-year terms are possible, and you can choose periodic interest or interest on maturity.
What is the Public Provident Fund (PPF)?
The PPF is a 15-year government-backed savings plan with an interest rate quarterly determined by the Ministry of Finance, currently around 7.1% per annum (compound yearly). Anyone can invest anywhere from ₹500 up to ₹1.5 lakh every year. Tax benefits apply to PPF under Section 80C of the Income Tax Act too.
Returns and tax treatment
While FDs are able to yield slightly better returns than PPF at times, interest earned on FDs is taxed based on your income slab. However, PPF enjoys exempt-exempt-exempt (EEE) status—i.e., investment, interest earned, and maturity value are all tax-free.
For the high-income tax payers, this difference in tax treatment can substantially reduce the actual returns on FDs. Suppose a person in the 30% tax bracket earns a 7% return on an FD. Such a person would have less than 5% left after paying tax, making PPF a superior tax-saving option.
Liquidity and flexibility
FDs give much higher liquidity. You can withdraw prematurely—although a fee is payable—and loans against FDs are also available. PPF, on the other hand, has severe withdrawal conditions. Partial withdrawal is available only after the seventh year, and loan against PPF balance is available only in the 3rd to 6th year. The 15-year lock-in makes it unsuitable for short-term needs.
Risk and safety
Both are secure, but PPF is slightly more secure because it is Government of India guaranteed. FDs also are very secure, especially those parked in large, stable banks and those covered up to ₹5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
Which one do you choose?
Choose FDs if:
• You need short- to medium-term parking of funds
• Liquidity is of the essence
• You are in a lower tax bracket
Choose PPF if:
• You wish to create long-term, tax-free wealth
• Saving for retirement or child education is your objective
• You are in a higher tax bracket and prefer to save under Section 80C
Both FDs and PPF can coexist in an ideal portfolio. The choice depends upon your investment horizon, goals, and the tax situation.
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