PPF v/s FD: Which is better for your savings?
What's the story
Public Provident Fund (PPF) and Fixed Deposits (FDs) are two of the most popular investment options in India. Both offer guaranteed returns but differ in terms of tenure, liquidity, and risk. While PPF is a long-term investment with tax benefits, FDs offer flexibility in terms of tenure. Knowing the pros and cons of both can help you make informed investment decisions depending on your financial goals.
#1
Understanding PPF: Long-term benefits
PPF is a government-backed savings scheme with a minimum tenure of 15 years. It offers attractive interest rates (currently around 7.1% per annum) and the interest earned is tax-free. You can invest a minimum of ₹500 up to ₹1.5 lakh per financial year. The long lock-in period makes PPF ideal for those looking for long-term wealth creation without any market risks.
#2
Fixed deposits: Flexibility and security
FDs are offered by banks and financial institutions for varying tenures, usually from seven days to 10 years or more. They provide fixed interest rates (ranging from 6% to 8% per annum depending on the bank and tenure) and are less risky than market-linked investments. FDs also allow premature withdrawals (usually with a penalty), making them more flexible than PPFs.
#3
Tax implications: Comparing tax benefits
While both PPF and FD provide tax benefits under Section 80C of the Income Tax Act, only PPF has tax-free maturity proceeds. The interest earned on FDs is taxable as per your income tax slab unless you invest in tax-saving FDs with a lock-in period of five years. This difference makes PPF more attractive for those looking for tax-efficient long-term investments.
#4
Liquidity concerns: Accessing funds early
One of the biggest drawbacks of PPF is its long lock-in period of 15 years with no premature withdrawals (except under certain conditions after the end of the sixth financial year). While partial withdrawals are allowed after the end of the sixth financial year, they are limited to a certain amount every year. This makes PPF less liquid than FDs, which allow premature withdrawals (usually with a penalty).