PPF or FD: Which has a lock-in period?
What's the story
Public Provident Fund (PPF) and Fixed Deposits (FDs) are two popular investment options in India. While both serve the purpose of saving, they have their own advantages and disadvantages. Knowing these can help you make an informed decision depending on your financial goals. Here, we look at the differences between PPF and FDs to help you choose the right one for your needs.
#1
Understanding the Public Provident Fund
PPF is a long-term savings scheme backed by the government. It has a lock-in period of 15 years, which means you cannot withdraw your money before that, except under certain conditions. The current interest rate on PPF is around 7.1% per annum, compounded annually. The minimum investment required is ₹500 per year, while the maximum is ₹1.5 lakh per year.
#2
Exploring fixed deposits
Fixed deposits are offered by banks and other financial institutions for a fixed tenure. Unlike PPF, FDs have no lock-in period; you can choose tenures ranging from seven days to 10 years or more. The interest rates on FDs vary depending on the bank and tenure, but generally range between 5% and 7% per annum. Unlike PPF, FDs allow premature withdrawal (with penalty).
#3
Tax implications of each option
PPF contributions qualify for tax deduction under Section 80C of the Income Tax Act (up to ₹1.5 lakh per annum). The interest earned and maturity amount are tax-free as well. FDs don't offer similar tax benefits; the interest earned is taxable as per your income tax slab rate. However, senior citizens get higher interest rates on FDs and may benefit from tax-saving options.
Tip 1
Liquidity considerations in decision-making
Liquidity refers to how easily you can access your money when needed without penalties or loss of interest. While PPF has a long lock-in period, it offers partial withdrawals after seven years under specific conditions, allowing some flexibility during emergencies or unforeseen expenses. On the other hand, FDs provide immediate liquidity options through premature withdrawal (with penalties), making them more suitable for short-term financial needs or unexpected expenses.