PPF v/s FD: Which is better for NRIs?
What's the story
For non-resident Indians looking to invest in India, Public Provident Fund (PPF) and Fixed Deposits (FDs) are two of the most popular options. Both come with their own benefits and limitations, making them suitable for different investment goals. While PPF offers long-term savings with tax benefits, FDs provide short-term liquidity with guaranteed returns. Here's a look at the key differences between the two.
#1
Understanding PPF's long-term benefits
PPF is a government-backed savings scheme that has a 15-year maturity period. It offers a fixed interest rate, which is currently around 7.1% per annum, compounded annually. The minimum annual contribution is ₹500 and the maximum is ₹1.5 lakh. PPF accounts can also be extended in blocks of five years after maturity. The scheme also offers tax deductions under Section 80C of the Income Tax Act.
#2
Exploring FD's short-term liquidity
Fixed Deposits are offered by banks and financial institutions for varying tenures, usually ranging from seven days to 10 years. The interest rates on FDs are generally higher than those on savings accounts but lower than PPF rates. NRIs can open FDs in foreign currency or rupee denominations. Unlike PPF, there are no tax benefits associated with FDs, but they offer more liquidity as funds can be withdrawn before maturity, subject to penalties.
#3
Comparing risk levels in investments
PPF is considered a low-risk investment as it is backed by the government of India. The principal amount and interest earned are guaranteed at maturity. On the other hand, FDs also come with low risk but depend on the bank's stability. While bank failures are rare in India due to regulatory oversight, they can still happen. Hence, it's important to check if the bank is covered under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme.
#4
Evaluating tax implications on returns
The returns from PPF accounts are tax-free under Section 10(11) of the Income Tax Act, subject to certain conditions. However, the interest earned on FDs is taxable as per the individual's tax slab rate. NRIs may also be subject to TDS (tax deducted at source) on FD interest earnings, which can be claimed as a refund if they file income tax returns in India.