PPF vs FD: Which can be used as loan collateral?
What's the story
Public Provident Fund (PPF) and Fixed Deposits (FDs) are two popular investment options in India. While both of them have their own benefits, one of the most common queries is whether they can be used as collateral for loans. This article will take a look at the differences between PPF and FD in terms of loan collateral and how they can help you financially.
#1
Understanding PPF and its limitations
PPF is a long-term savings scheme backed by the government of India with a tenure of 15 years. It offers tax benefits under Section 80C but cannot be used as collateral for loans. The account holder cannot withdraw or take a loan against their PPF balance until the account matures, except under certain conditions. This makes PPF a safe but less flexible option when it comes to immediate financial needs.
#2
Fixed deposits: A flexible option
Unlike PPF, fixed deposits allow you to use your deposit as collateral for loans. Many banks offer loan amounts up to 90% of the FD value, making it a great option for those looking for quick liquidity without breaking their investment. The interest rates on these loans are usually lower than unsecured loans, making FDs an attractive option for borrowers.
#3
Interest rates and loan costs
The interest rate on loans against fixed deposits is usually lower than that of personal or unsecured loans. It can vary from 1% to 2% above the FD interest rate. On the other hand, since you can't use PPF as collateral, any financial need would require other forms of borrowing or liquidating other assets.
Tip 1
Tax implications of each option
While PPF contributions qualify for tax deductions under Section 80C, any interest earned is tax-free after maturity. However, since you can't use it as collateral, you may lose out on potential tax benefits if you need funds quickly. For FDs, interest earned is taxable, but the ability to borrow against them provides immediate liquidity without tax implications at the time of borrowing.