In the world of investments, making informed choices is crucial, especially when it comes to balancing returns, risk, and the flexibility of investment options. There are instances where the preference is for an investment method allowing payments in installments, coupled with an attractive interest rate and the safety of invested funds. In such scenarios, Bank Recurring Deposit (RD) and Public Provident Fund (PPF) emerge as potential choices. Each option carries its unique set of benefits and drawbacks, leading to a common dilemma among investors. In this article, we aim to provide an in-depth comparison of PPF vs RD, enabling you to make an informed decision aligned with your financial goals and preferences.
What is a Public Provident Fund(PPF)?
Public Provident Fund (PPF) stands as a long-term investment scheme favoured by individuals seeking both high and stable returns. The primary objective of opening a PPF account is the secure preservation of the principal amount. When an individual opts for a PPF scheme, a dedicated PPF account is created, where money is deposited monthly, and interest is compounded.
- Interest Rate of PPF: 7.1% per annum
- Tax Benefit: Up to Rs.1.5 lakh under Section 80C
- Risk Profile: Offers guaranteed, risk-free returns
- Minimum Investment Amount: Rs.500
- Maximum Investment Amount: Rs 1.5 lakh per annum
- Tenure: 15 years
What is a Recurring Deposit(RD)?
Recurring Deposit (RD) stands out as a popular low-risk investment tool in India, offering moderate and assured returns. This investment option provides flexibility in terms of investment amount and tenure, catering to various financial needs. Offered by multiple banks and Non-Banking Financial Companies (NBFCs), RD is available in flexible tenure options ranging from 6 months to 10 years. It allows customers to channel monthly savings for either short-term or long-term wealth creation.
- Flexible tenure options: 6 months to 10 years
- Monthly savings for long or short-term goals
- Minimum monthly investment
- Assured wealth generation over the chosen term
Learn more details – What is a Recurring Deposit Account?
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Difference Between PPF and RD
| Basis of Difference | Bank Recurring Deposit (RD) | Public Provident Fund (PPF) |
| Objective | Encourages regular saving habits. | Aims to provide tax benefits under section 80C with guaranteed returns. |
| Meaning | Requires investors to deposit a pre-specified amount at regular intervals for the long term. | A long-term savings instrument established by the central government, ensuring tax-free maturity for old-age income security. |
| Investible Amount | Usually in monthly installments. | Can be invested in smaller, unequal units, or lump sum amounts in a PPF account. |
| Maximum Investment Amount | No specific limit. | Limited to Rs. 150,000 per year. |
| Interest Rates | Varies between banks, dependent on tenure. | Fixed, currently at 8.1% per annum. |
| Interest Rate Compounding | Quarterly. | Annually. |
| Tax on Interest Earned | Taxable based on the investor's income tax slab. | No tax on interest earned. |
| Liquidity | Yes. | No. |
| Tenure | 6 months to 10 years. | 15 years, extendable in multiples of 5 years. |
| Income Tax Rebate u/s 80C | No. | Yes, up to Rs 1,50,000 per year. |
| Maturity | Taxable. | Tax-free. |
| Premature Withdrawals | Entire amount can be withdrawn at any time with a penalty. Partial withdrawals are not allowed. | Can be withdrawn from the 7th financial year onwards, with one partial withdrawal allowed per financial year. |
| Loans | Loan facility available up to 90% of the deposit value in the RD, requiring the RD as collateral. The interest rate on such loans is around 0.5% to 2% higher than the fixed deposit rate. | Loan availability from the third year onwards. |
| TDS (Tax Deduction at Source) | Yes, at a rate of 10% on interest earned, if it exceeds Rs. 10,000 in one financial year. Investors can submit Form 15G (for age below 60)/Form 15H (for age above 60) to avoid TDS. | No TDS. |
| Risk | Relatively risky. | Considered the safest investment. |
| Periodic Income | No. | No. |
RD vs PPF: Which one is better?
Choosing between RD and PPF requires consideration of various factors, including investment horizon, risk tolerance, and tax implications. Let's break down the comparison:
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Investment Horizon
- RD: Suited for shorter investment horizons, allowing you to accumulate savings over a shorter period.
- PPF: Ideal for a longer-term outlook, beneficial for saving towards retirement or other long-term financial goals.
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Risk Tolerance
- RD: Typically carries a lower risk, making it a safer option compared to stock market investments or mutual funds.
- PPF: Government-backed, considered relatively safe with guaranteed, risk-free returns.
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Tax Considerations
- RD: Taxable as per your income tax slab.
- PPF: Provides tax benefits under Section 80C of the Income Tax Act, allowing deductions up to Rs.1.5 lakh.
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Financial Goals
- RD: Suitable for short-term savings with flexibility and liquidity.
- PPF: Ideal for long-term investment goals, offering tax advantages while saving for retirement or other extended financial objectives.
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Closing Thoughts
In the RD vs. PPF debate, the right choice depends on your unique financial situation. If you are looking for a short-term savings option with flexibility and liquidity, RD might be your preferred choice. On the other hand, if you have a longer investment horizon, seek tax advantages, and aim for secure, long-term savings, PPF emerges as the better option. It is advisable to carefully assess your specific financial goals, risk tolerance, and consult with a financial advisor to make an informed decision that aligns with your financial objectives.
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