PPF or FD: Which is better for emergencies?
What's the story
Public Provident Fund (PPF) and Fixed Deposits (FDs) are two popular investment options for the middle class in India. While both serve the purpose of saving, they have their own benefits and shortcomings. Knowing these can help you make better decisions for your emergency funds. Here, we compare PPF and FDs on various parameters to help you choose the right option for your needs.
#1
Interest rates comparison
PPF has a government-set interest rate, which is usually higher than most bank FDs. As of now, PPF offers an interest rate of around 7.1% per annum, compounded annually. On the other hand, FD rates vary according to banks but usually range between five% to seven% per annum. This difference in rates makes PPF a more attractive long-term investment option.
#2
Lock-in period considerations
One major difference between PPF and FDs is the lock-in period. PPF has a minimum lock-in period of 15 years, which may not be ideal for those needing quick access to their funds. However, partial withdrawals are allowed after the completion of five years under certain conditions. FDs usually have flexible tenures starting from seven days up to 10 years, giving more liquidity.
#3
Tax implications
Another important factor to consider is tax benefits associated with these investments. Contributions to PPF are eligible for deduction under Section 80C of the Income Tax Act, up to ₹1.5 lakh a year. The interest earned on PPF is tax-free as well. On the other hand, while FD interest is taxable as per the individual's income tax slab, there are no deductions available for deposits made in FDs.
#4
Risk factors involved
Both PPF and FDs are considered safe investment options with negligible risk of losing principal amounts because they are backed by government schemes or bank guarantees. However, inflation risk is higher with FDs as compared to PPF due to lower interest rates offered by banks as compared to inflation rates over long periods.