PPF v/s FD: Which offers better tax benefits?
What's the story
Public Provident Fund (PPF) and Fixed Deposits (FDs) are two of the most popular investment options in India. Both offer tax benefits, making them attractive to investors looking to save on taxes. While PPF is a long-term savings scheme backed by the government, FDs are offered by banks and financial institutions for fixed tenure. Here's a look at the tax benefits of PPF and FDs, and how they compare.
#1
Understanding PPF tax benefits
PPF is a government-backed savings scheme with a 15-year lock-in period. Contributions to PPF are eligible for tax deductions under Section 80C of the Income Tax Act, up to ₹1.5 lakh a year. The interest earned on PPF accounts is tax-free, making it an attractive option for long-term investors looking to grow their savings without worrying about taxes.
#2
FD tax implications explained
Fixed Deposits also come with tax implications that vary according to the tenure of the deposit. If the tenure is less than five years, the interest earned is taxable as per the individual's income tax slab. However, if the FD is for five years or more, it qualifies for deductions under Section 80C up to ₹1.5 lakh a year. Unlike PPF, the interest earned on FDs is taxable.
#3
Comparing interest rates
The interest rates on PPF are usually lower than those on bank FDs but come with the benefit of being tax-free. As of now, PPF offers an interest rate of around 7.1% per annum, which is revised quarterly by the government. Bank FDs can offer higher returns, anywhere between 5% and 7.5% per annum, depending on the bank and market conditions.
#4
Liquidity considerations
Liquidity is another factor to consider while investing in PPF or FD. PPF has a long lock-in period of 15 years with limited withdrawal options before maturity. On the other hand, bank FDs offer more flexibility with shorter tenures ranging from seven days to ten years, allowing investors access to their funds sooner if required.