RD or PPF: Beginner's guide to choosing the best investment
What's the story
Investing is a key to financial stability, but for beginners in India, navigating the world of investment can be overwhelming. Two common options are Recurring Deposits (RD) and Public Provident Fund (PPF). Each has its advantages and aligns with different financial objectives. This article unpacks the details of RD and PPF, providing beginners with the insights they need to choose wisely.
Basics
Understanding recurring deposits
A Recurring Deposit (RD) is a term deposit provided by banks that allows you to deposit a fixed sum every month for a specified period. Interest rates for RDs range from 5% to 7%, depending on the bank and tenure. It's a perfect investment for individuals who want to save regularly but not put a large amount at once.
PPF perks
The appeal of Public Provident Fund
The Public Provident Fund (PPF) is a government-backed long-term savings scheme that provides tax-free returns at a reasonably high-interest rate of around 7% to 8%. With a low minimum annual investment of ₹500 and a maximum of ₹150,000, it is affordable for most investors. Its lock-in period of 15 years instills a sense of long-term savings discipline in investors.
Flexibility
Comparing liquidity options
RDs provide higher liquidity compared to PPFs. You can prematurely close or withdraw from your RD account, although it usually comes with a penalty. In contrast, PPF permits partial withdrawals only after the completion of five years from the end of the year in which the account was opened. This makes it less liquid but promotes long-term savings.
Tax talk
Tax implications simplified
Choosing between an RD and a PPF also requires understanding the tax implications. RD interest is taxable at your income tax slab rates, which can reduce net returns for higher earners. In contrast, a PPF has EEE status—deposits, interest earned, and withdrawals are all exempt from tax under Section 80C of the Income Tax Act.
Decision time
Final tips for beginners
The choice between RD and PPF should be based on your financial objectives, risk tolerance, and investment timeframe. If your goal is short-term savings with convenience in depositing and withdrawing, RD may be a better fit for you. On the other hand, if you are focused on long-term wealth building with favorable tax treatment, then investing in PPF would be more beneficial.