Public Provident Fund (PPF) vs Fixed Deposit (FD): Know which is a better tax saving option

The magic of compounding can do wonders for your PPF investment

Tax experts are of the view that Public Provident Funds (PPF) and tax-saving Fixed Deposits (FD) are good options for tax-saving and long-term investing depending on an individual’s investment objectives.

While PPFs offer a variable rate of interest that is decided by the Finance Ministry, FDs offer a fixed rate of interest for a predetermined period of time.

However, individuals should know the difference between the two types of accounts as they offer tax benefits and the chance to earn interest on investments. Many taxpayers choose the PPF as a preferred fixed income, tax-saving investment option for long-term goals such as retirement.

Long-term savings vs Flexibility

Tax planners say PPFs are best for those looking for long-term savings with tax benefits and a safe investment option. FDs, on the other hand, give more flexibility and liquidity, making the right choice for investors, who may need access to their funds in the shorter term. It is always better to assess your specific needs and take advice from a financial planner to make an informed decision that goes with your financial objectives.

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Risks of Investing in FDs

There are a few disadvantages as well. While PPFs give tax benefits, FDs are subject to tax on the interest gained as per the individual’s tax slab. Further, FD returns may not always beat inflation, meaning the actual value of savings might drop over time. More importantly, FDs are not guaranteed by the government, while deposits up to Rs 5 lakh per bank are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). The security PPF provides is unparalleled because of the government's backing.

Tax benefits

Individuals’ contributions to PPF are qualified for tax deductions under Section 80C of the Income Tax Act, which can help cut your tax liability. Plus, the interest earned and the maturity amount are tax-free, making it an attractive option from a salaried tax perspective. PPF is the only debt instrument with an exempt-exempt-exempt (EEE) status.

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Interest rate

The current interest rate on PPF is 7.1 percent (for the July-September quarter), which is higher than the 6.50 percent offered by the State Bank of India (SBI) on tax-saving fixed deposits.

Lock-in period

If you lock in your money at a lower interest rate for a longer period, you will lose out when the rate goes go up. This is one of the several factors reasons why the PPF scores over products such as the 5-year tax-saving bank FD. Fixed deposit interest rates are constant for the full investment period, the interest rate of PPF is floating which can alter every quarter.

Power of compounding

The magic of compounding can do wonders for your PPF investment. A PPF account matures in 15 years and after maturity, you can either withdraw the full amount and close the account or extend it for another five years with or without making further contributions. The extension in blocks of five years can be done indefinitely.

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For instance, if put in Rs 50,000 each year in your PPF account, you can build a corpus of nearly Rs 14.06 lakh in 15 years, if the interest rate remains static at 7.1 percent. However, if you extend it for another 5 years this amount soars to Rs 22.69 lakh.

Withdrawals and loan facilities

Another reason that makes PPF a far more appealing option is that it gives an opportunity for partial withdrawals and provides loan facilities after the completion of the 7th year, providing some degree of liquidity during medical emergencies or financial needs such as children's education or marriage.

In a nutshell, experts say individuals must choose an investment option as per their mandate and time horizon. if a smaller investment tenure suits your investment goal, choose FD. If your investment purpose allows you to invest longer, you should opt for PPF.