Which Is Better Investment Fd Or Ppf

Introduction

Investing in a fixed deposit (FD) or a public provident fund (PPF) requires some basic know-how on an investor’s part. Often, investors get confused between FD and PPF. It could be dangerous to rely on recommendations from other investors considering every individual has his or her own financial goals. Hence, it is imperative for an investor to exercise a certain degree of caution, self-learning, and be responsible for their investments.

What is Fixed Deposit

Fixed deposit is a financial instrument offered by banks and financial institutions in India. It is considered as one of the safest investment options which offer high returns with flexible tenure options. Fixed Deposit (FD) can also be defined as a type of term deposit offered by banks and other non-banking financial companies (NBFC).

Fixed Deposits offer higher interest rates as compared to savings accounts but come with certain terms and conditions. For instance, the invested amount must be locked for a fixed tenure ranging between 7 days and 10 years at a fixed rate of interest. Interests earned on FDs are either paid out at regular intervals or are reinvested, depending on the investor’s choice. The maturity amount of the fixed deposit is paid out at the end of the tenure.

What is PPF or Public Provident Fund

Public Provident Fund (PPF) is a savings instrument which was introduced in India in 1968. Its main objective is to mobilize small savings in the form of investment, coupled with a return on it. It can also be called a savings-cum-tax savings investment vehicle that enables one to build a retirement corpus while saving on annual taxes. An investor who is looking for a safe investment option to save taxes and earn guaranteed returns should open a PPF account.

Public Provident Fund (PPF) scheme is a long-term investment mechanism that offers an attractive rate of interest and returns on the amount invested. An investor must open a PPF account under this scheme and the amount deposited during a year can be claimed under section 80C deductions.

Main Features of FD & PPF

1. Interest Rates

• Interest Rates on FD – Various banks and NBFCs offer different interest rates on FDs depending on the tenure and amount invested. Here are some of the highest interest rates offered on FDs in India. FD interest rates are higher as compared to savings accounts. The interest pay-out or compounding frequencies vary between FD schemes and are usually done on a quarterly, half-yearly or yearly basis. The interest rate for tax-saving FDs is decided at the start of every financial year by the government and is the same across banks.

Bank	Interest Rate (% p.a.)	Tenure
Fincare Small Finance Bank	9	24 – 36 months
ESAF Small Finance Bank	8.25	365-727 days
Suryoday Small Finance Bank	8.75	24 – 36 months
Equitas Small Finance Bank	8.3	2 - 3 years
Ujjivan Small Finance Bank	8.3	799 days
Utkarsh Small Finance Bank	9	456 days – 2 years
Jana Small Finance Bank	8.6	1 – 2 years
IDFC First Bank	8	1 – 2 years
DCB Bank	7.8	18 months
RBL Bank	7.75	24 – 36 months
IndusInd Bank	7.5	1 – 2 years

 

• Interest Rates on PPF - The prevailing interest rate on PPF is 7.9% and it is compounded annually. The Finance Ministry sets this interest rate every year, which is paid on 31st March. The interest is calculated on the lowest balance between the close of the fifth day and last day of every month.

2. Tenure

Fixed Deposits have a time period or tenure for which the sum invested gets fixed or locked. Different financial institutions offer different tenure options. Investors should always compare fixed deposits offered by different financial institutions and then make a choice. The tenure that an investor chooses will also decide the interest rate the bank will offer. Longer the tenure, higher the FD interest rates.

The PPF has a minimum tenure of 15 years, which can be extended in parts of 5 years as per the investor’s needs.

3. Minimum and Maximum Investment

Fixed Deposits generally have a minimum investment requirement of Rs. 5,000 and there is no upper limit set by most banks or NBFCs. In comparison, PPF has a minimum investment requirement of Rs. 500 per annum and the maximum that can be invested is Rs. 1,50,000 per annum. PPF allows a maximum of 12 deposits in any financial year. 

4. Tax Benefit

Interest on fixed deposits is fully taxable at the applicable slab rate. If the interest exceeds Rs 10,000 in a year, TDS (Tax Deducted at Source) is deducted on it, by the concerned bank. Interest on fixed deposits up to Rs 50,000 per annum is tax-free for senior citizens under Section 80TTB and no TDS is deducted on the same.

PPF interest is completely tax-free. Contributions to the PPF are also tax-deductible under Section 80C up to Rs 1.5 lakh per annum. Further, the interest credited as well as maturity amount of PPF is tax-exempt. 

5. Where to Open Account

Opening an FD account can be easily done by approaching the bank or NBFC offering FD facility. An FD account can be opened after depositing the minimum amount and submitting the necessary documentation.

A PPF account can be opened with either a Post Office or with any nationalized bank like the State Bank of India or Punjab National Bank, etc. Some of the private banks like ICICI, HDFC and Axis Bank are also authorized to open a PPF account. 

6. Nomination

While opening an FD account an investor can opt for nomination facility by filling in relevant details in the application form. Nomination can also be amended during the tenure of the FD.

A PPF account holder can designate a nominee for his or her account either at the time of opening the account or subsequently during the PPF tenure.

7. Mode of Payment

Fixed Deposits can be opened online by making an online payment and filling relevant details along with KYC information. Subsequent additions to FD amount can also be made online or visiting the nearest branch for cheque or cash deposits.

Payment for PPF can be made via either cash or crossed cheque or demand draft or pay order or online transfer in favour of the Accounts Officer.

Key Differences between FD & PPF

Some of the key differences between FD and PPF include:

1. Maturity – There is no lock-in period for bank FDs and maturity period ranges from 7 days to 10 years in most cases. Tax-saving FDs do have a lock-in period of 5 years. When it comes to PPF, there is a minimum lock-in period of 5 years within which an investor cannot make any withdrawals from the account. Maturity of PPF account is 15 years.

2. Premature Withdrawals – FDs generally allow withdrawal facility before maturity. Hence, in case of an emergency, an investor can easily make premature withdrawals from FD accounts except in the case of Tax-saving FDs. PPF allows withdrawal only after completion of 5 years of lock-in period and an investor can freely make withdrawals as per the stated limits.

3. Tax Benefits – Tax-saving FDs attract tax benefits whereas the non-tax-saving FDs do not. Simple FDs have taxable interest earnings. On the other hand, PPF attracts tax deduction and also tax-free interest and maturity amount.

4. FD vs PPF – Where to Invest – Depending on an individual’s liquidity needs, prevailing interest rates, risk type, objective, and inflation he or she can choose between FD or PPF. FDs allow far better liquidity as compared to PPF. On the other hand, PPF instils a sense of saving in investors since no withdrawals can be made up to 5 years.

Additional Reading: Which is better RD or FD?

End Note

Fixed Deposits and PPFs are two of the most traditional and risk-free forms of investment. When it comes to choosing between these two, you can focus on priorities such as tax-saving, interest rates, and liquidity needs. Investing in either of these two modes could be beneficial because you can build a savings habit. Depending on the economic situation, interest rates could fluctuate in FDs, however interest rate on PPF generally tends to remain untouched in most situations. In this article, you can learn about some of the key differences between the two and also which one is best suited for you.