Does PPF have a higher lock-in period than FD?
What's the story
Public Provident Fund (PPF) and Fixed Deposits (FDs) are two of the most popular investment options in India. Both come with their own set of benefits, but the biggest difference between the two is the lock-in period. While PPF comes with a 15-year lock-in period, FDs usually have shorter tenures. Here is how this difference impacts your investment decisions.
#1
Understanding PPF's lock-in period
PPF has a mandatory lock-in period of 15 years. This means that investors cannot withdraw their principal amount before the end of this period. However, partial withdrawals are allowed after the sixth year under certain conditions. The long lock-in period is aimed at encouraging long-term savings, and it offers a fixed interest rate, which is currently higher than most savings accounts.
#2
Flexibility offered by fixed deposits
Unlike PPF, fixed deposits provide much more flexibility in terms of tenure. Investors can choose tenures ranging from seven days to 10 years or more, depending on the bank's policies. This flexibility makes FDs an attractive option for those looking for short-term investment solutions or planning for specific financial goals within a shorter time frame.
#3
Interest rates comparison between PPF and FD
The interest rate on PPF is currently fixed at 7.1% per annum, which is compounded annually. On the other hand, FD interest rates vary between banks, but generally range from 5% to 7% per annum, depending on the tenure chosen and prevailing market conditions. While PPF offers guaranteed returns over a long period, FDs may offer higher returns for shorter investments.
Tip 1
Tax implications of PPF and FD investments
Investments in PPF are exempt from tax under Section 80C of the Income Tax Act, up to a limit of ₹1.5 lakh per financial year. The interest earned on PPF accounts is also tax-free. However, interest earned on fixed deposits over ₹40,000 per annum is taxable, as per the individual's income tax slab rate.