Fixed Deposit (FD) vs. Public Provident Fund (PPF): Making the Right Choice

Planning for your financial future is a smart move, whether it’s for retirement or building a financial safety net. In India, saving has been a long-standing tradition, and fortunately, we have various investment options to choose from. In this article, we’ll take a closer look at two popular investment tools: Fixed Deposits and PPF schemes. We’ll explore their features, benefits, and compare the two to help you decide which one suits your financial goals better.

What is a Fixed Deposit?

Fixed deposit accounts are a go-to choice for many when it comes to safe and secure savings. Offered by banks and Non-Banking Financial Companies (NBFCs), FDs are known for their stability. The interest rates on FDs are set by the government of India, shielding them from market fluctuations. With an FD, you deposit a lump-sum amount, and in return, you receive a predetermined fixed interest over a specified period.

Benefits of Fixed Deposit:

The following are the benefits of a fixed deposit account:

  • Regular interest income
  • Guaranteed returns
  • Flexible tenure options
  • Tax benefits
  • Senior citizens can enjoy higher interest rates

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What is a Public Provident Fund?

The Public Provident Fund (PPF) is a government-backed investment and tax-saving instrument. Introduced in 1968 by the Ministry of Finance, PPF is regarded as one of the safest long-term investment options available in the market. Initially designed to encourage savings among salaried individuals, PPF offers a current interest rate of 7.1%, which is regulated by the government of India on a quarterly basis. One of the key advantages of PPF is its ability to provide profitable returns on investment while also offering tax deductions.

Benefits of PPF:

Here’s why PPF is a popular choice:

  • Mandatory annual deposits for a 15-year tenure
  • Minimum deposit: Rs. 500; Maximum deposit: Rs. 1.5 lakh
  • Tax advantages
  • Fixed 15-year duration
  • Government-backed security
  • Option to add nominees
  • Multiple deposit methods, including demand drafts, internet transfers, checks, and cash

Difference Between Fixed Deposits and PPF

Parameters Fixed Deposit (FD) Public Provident Fund (PPF)
Issuing authority FDs are offered by Non-Banking Financial Companies (NBFCs) and Banks. PPF is a government-backed savings scheme provided by the Government of India.
Initial Deposit FDs can be opened with as little as ₹100 in some cases, while others may require ₹1000 or more. PPF accounts require a minimum deposit of ₹500 to start.
Liquidity FDs offer moderate liquidity as they have specific tenures, but some banks offer FDs for up to 20 years. PPF offers lower liquidity due to a mandatory 15-year lock-in period, extendable in blocks of 5 years.
Investment Duration FDs can have tenures ranging from 7 days to 10 years, with some banks offering longer terms. PPF accounts have a fixed 15-year tenure, but they can be extended in blocks of 5 years indefinitely.
Eligibile Account Holders FDs are available to residents, Hindu Undivided Families (HUFs), trusts, corporation firms, and NRIs. PPF accounts are open only to Indian residents.
Account Type FDs can be opened as joint accounts with multiple account holders. PPF accounts do not allow joint ownership.
Annual Interest Percentage FD interest rates vary, typically ranging from 2.90% to 9.05%, depending on the bank and tenure. As of now PPF offers an interest rate of 7.1%
Loan Availability FDs usually allow loans against the deposit amount. FPPF accounts also allow loans but only after completing the 3rd financial year.
Withdrawal Restrictions Some FD types permit premature withdrawals with certain conditions. PPF allows partial withdrawals from the 5th financial year onwards.
Tax Deductions for Investments Tax exemption up to ₹1.5 lakh under section 80C for tax-saving FDs. Deposits in PPF qualify for deductions under section 80C of the Income Tax Act, with a maximum limit of ₹1.5 lakhs per year for all investments combined.
Taxation on Interest Gains Interest earned on FDs is subject to taxation. The interest earned on PPF is completely exempt from income tax.

Who Should Opt for Fixed Deposit (FD):

Choosing between FD and PPF depends on your financial objectives and preferences. Consider investing in a fixed deposit if:

  • You seek assured interest income on your investment.
  • You prefer flexibility in the investment tenor.
  • You are looking for a source of regular income.

Who Should Opt for Public Provident Fund (PPF):

To make a well-informed comparison between FD and PPF, it’s important to determine when investing in the Public Provident Fund is the right fit:

  • You are planning for long-term investments.
  • You are interested in tax-saving investments.
  • You do not require additional regular income at present.

FD vs. PPF: Making the Right Choice

Both FD and PPF appeal to risk-averse investors. PPF is often favored by those seeking tax savings along with financial security. The government’s backing provides unparalleled safety, and the interest earned is tax-free, making it an attractive choice. However, PPF comes with a lengthy lock-in period with limited withdrawal options, which begin only from the 7th year.

On the other hand, FDs offer greater liquidity and flexibility in choosing the investment tenure. Tax-saving FDs have a shorter lock-in period of 5 years, considerably less than PPF. However, FDs carry certain risks, and the interest earned is taxable.

So, if you can commit to a 15-year lock-in, PPF may be a suitable choice, considering all factors.

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Can I Open Both FD and PPF Accounts?

Yes, you can open both a fixed deposit account and a PPF account in your name.

Can I Open a Joint Account for FD or PPF?

You can open a joint account for an FD, but this option is not available for PPF accounts. Each individual must have a separate PPF account.

Can I Extend the Tenure of My PPF Account?

Yes, the tenure of a PPF account can be extended in 5-year increments.

FD vs. RD vs. PPF: Which Is Better?

If you have a lump sum amount, FDs are a good choice. For those without a lump sum, recurring deposits (RDs) may be better. PPF, with its 15-year tenure, is an option for long-term investors willing to commit.