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FD vs PPF – Advantages and Disadvantages

Investors are always on the lookout for appropriate schemes which would help them increase their corpus. Fixed deposit schemes and the Public Provident Fund (PPF) are two popular investment options among Indian investors, especially for those who have a low-risk appetite. 

However, it can still be confusing for investors when it comes to choosing between FD vs PPF. Well, the choice generally depends on individual goals and risk-taking capacity. However, giving this blog a quick read will help you make an informed decision. 

Fixed Deposit vs PPF 

The following table provides the differences between PPF and FD: 

Parameters Public Provident Fund Fixed Deposit 
Issuing Body Government of India NBFCs and banks 
Minimum Deposit Amount ₹500 in a financial year Ranges between ₹100 and ₹10,000 
Maximum Deposit Amount ₹1.5 lakh in a financial year No maximum limit 
Liquidity Low liquidity Moderate liquidity 
Investment Tenure 15 years 7 days to 10 years 
Eligibility Resident Indians only Resident Indians, Non-Resident Indians, Trusts, HUFs, Corporations, Firms
Joint Account Not allowed Allowed 
Loan against Deposit Will be made available only after completing 3 financial years Available 
Premature Withdrawal Will be allowed only from the 5th financial year Allowed for specific FDs 
Taxation Not taxable Taxable 

What is a Fixed Deposit?

Fixed deposit schemes are savings schemes that are also traditional fixed-income instruments offered by banks and NBFCs (Non-Banking Financial Corporations). It is one of the safest investment options in India which is also the reason behind its popularity. Considering that the Government of India fixes the interest rates for FDs, these schemes are not much impacted by market movements. 

Under this type of investment, investors deposit a lump sum amount in an FD account, depending on their financial capacity and investment horizon. The principal amount earns a pre-decided interest rate throughout a predetermined tenure. After the tenure is over, the depositor receives the entire FD investment, including the principal and the interest amount. 

Benefits of Fixed Deposit 

Go through the features and benefits of FD schemes to make an informed decision: 

  1. Guaranteed returns: Considering that FD interest rates remain fixed irrespective of the market situation, the depositors receive assured interest on their investments. Guaranteed returns make FDs a safe investment option. 
  2. Flexible tenure: There is a lot of flexibility when it comes to choosing the tenure for FD schemes. You can choose a short or a long investment horizon, depending on your financial goals. The FD tenures vary for different banks, generally ranging between 7 days to 10 years. 
  3. Stable source of income: There are certain FDs which offer the option of monthly payouts. This feature makes FDs a source of a steady income stream. 
  4. High gains: If you invest in a cumulative FD scheme, you will get the benefit of compounded interest on a monthly, quarterly, or half-yearly basis. As a result, depositors have the option of earning considerably higher returns on their principal amount. 
  5. Tax benefits: If you wish to save taxes, you can invest in tax-saving fixed deposit schemes. Investment in such schemes will reduce your taxable income for a financial year by ₹1,50,000 as per Section 80C of the Income Tax Act.
  6. Advantage for senior citizens: Banks offer higher FD interest rates for senior citizens which help them build a large corpus after they retire from active work. 

Who Should Invest in Fixed Deposit? 

Given below is the list of the people who should ideally invest in a fixed deposit scheme:

  1. If you do not wish to take any type of risk with your savings, you should invest in FD schemes. 
  2. Investing in FDs is ideal for people looking for flexible tenure. So, you can choose any tenure ranging from 7 days to 10 years. 
  3. If you are looking for income options that would act as a regular stream of income, you should invest in fixed deposits. 
  4. People who have a high risk appetite and invest actively in market-linked instruments can also consider investing in FD schemes as it would usher in portfolio diversification which is necessary to mitigate risk. 

What is a PPF?

The Public Provident Fund (PPF) is a tax-saving investment instrument backed by the Government of India. The Ministry of Finance introduced this scheme in 1968 to promote the concept of savings among salaried individuals. PPF is still considered to be one of the safest long-term savings schemes in the market. 

Benefits of PPF 

Check out the benefits of PPF in this section: 

  1. PPF is a long-term investment scheme that comes with a lock-in period of 15 years. The tenure can be extended for 5 years after the completion of this period. 
  2. Under Section 80C of the Income Tax Act, you can claim deductions up to ₹1.5 lakh. So, you can build a substantial corpus while saving taxes at the same time. 
  3. Investors can open a PPF account with an amount as low as ₹500.
  4. You can easily contribute to your PPF account through online bank transfers, cash, cheques, or demand drafts. 
  5. Investors can also avail nomination facilities under a PPF account. 

Who Should Invest in PPF?

Here’s a list of the people who should invest in PPFs: 

  1. People who are actively looking for tax-saving instruments should consider investing in Public Provident Funds. 
  2. Investors who have no problem remaining invested for a long investment horizon should invest in PPF. 
  3. Individuals who do not need a regular source of income and can lock in a portion of their funds easily should consider PPF as an investment option. 

Which is Better PPF or FD?

The answer to this question cannot be the same for everyone because the financial requirements of no two individuals are the same. Both fixed deposits and PPF are good investment options for investors with very low risk-taking capacity. 

PPFs are backed by the Government of India which has made it a safe and secure investment option. Depositors get tax benefits of up to ₹1.5 lakhs in a financial year. Moreover, taxes are not even applicable to the interest amount earned. Both of these features have lent it an edge against fixed deposits. 

However, PPFs have a lengthy lock-in period which has significantly lowered its liquidity. Limited withdrawal options are allowed only after a long period. 

On the other hand, FDs offer investors the option of liquidity. However, the interest you earn will be taxable. 

According to experts, people should analyze their financial goals, risk appetite, and day-to-day requirements before choosing an investment option. Having an idea about these factors would help one to make an informed decision. 

Conclusion

If you are confused about what to choose between FD vs PPF, you should choose the option most aligned with your investment requirements goal. While both these options are secure investments, the two options have varying interest rates, terms and conditions. Before choosing an option, make sure to verify their interest rates and other applicable terms and conditions. 

FAQs

What are the things to be kept in mind while choosing company FDs? 

The credit rating of the company is one of the most important things you need to check while choosing company FDs. Moreover, interest rates of the company FDs, history of repayment, and financial performance of the company offering the FDs are other factors you must keep in mind. 

What is the current interest rate offered by PPF schemes? 

The current interest rate offered by Public Provident Funds is 7.1%. 

What are the tax implications of fixed deposits? 

The interest that a person earns on fixed deposits will be taxable depending on the income tax slab of the depositor. 

What are the things to consider before investing in a fixed deposit scheme? 

Before you invest in a fixed deposit, calculate how much amount you can afford to deposit and the time duration of the investment. Only after you have considered the two, should you go ahead with an FD investment. 

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