It can be difficult to say which option is better between a fixed deposit (FD) and a public provident fund (PPF), as the right choice will depend on an individual’s specific financial situation and goals. Both FDs and PPFs are savings and investment vehicles that offer the potential for earning interest on your savings, and both can provide tax benefits. FDs are typically offered by banks and other financial institutions, and they usually offer a fixed rate of interest for a set period of time. PPFs, on the other hand, are government-backed investment schemes that are available to individuals, and they offer a variable rate of interest that is set by the Indian government.
To help you make an informed decision, we have discussed in detail the difference between fixed deposits and public provident fund and which is a better option of investment.
What is a Fixed Deposit (FD)?
Fixed deposits are savings instruments offered by banks and Non-Banking Financial Companies (NBFCs). As one of the safest investment options, the interest rate of FD is fixed by the government of India, thus the market fluctuations do not impact the returns on FDs. In a fixed deposit scheme an individual can deposit a lump-sum amount that accrues a fixed interest over a predetermined tenure.
Benefits Offered by Fixed Deposits
The following are the benefits offered by the fixed deposit scheme:
Guaranteed Return: The interest rates applicable on fixed deposits do not depend on the market fluctuations and remain fixed at the rate an individual has booked the FD. This ensures guaranteed returns on maturity.
Flexible Tenure: Based on the investment objective, an individual can opt for short-term or long-term fixed deposits. The tenure can range from a minimum of 7 days to a maximum of 10 years.
Higher Gains: Cumulative FDs compound interest on a half-yearly, quarterly or monthly basis. This guarantees higher gains on the principal amount.
Benefits for Senior Citizens: For senior citizens, most banks offer a higher fixed rate of interest. Therefore, it helps the senior citizen to accumulate larger savings with no risk involved.
Regular Source of Income: Some FDs provide the option of a monthly payout that can act as a steady source of income for individuals.
Tax Saving: Tax saving fixed deposit schemes can help to bring down the income tax liability. Investors can claim tax exemption under Section 80C of the Income Tax Act, 1961 up to a maximum limit of Rs.1,50,000.
What is a Public Provident Fund (PPF)?
Public Provident Fund (PPF) is an investment cum tax saving instrument backed by the government of India. Introduced in the year 1968 by the Ministry of Finance, PPF is considered as one of the safest options for long-term investment available in the market. It was initially introduced to encourage savings among salaried individuals. The PPF offers a current interest rate of 7.1%. The rate of interest is set by the government of India and is regulated every quarter. One of the major benefits of investing in PPF is that it provides a profitable return on investment along with the benefit of tax deductions.
Benefits Offered by Public Provident Fund (PPF)
Let’s take a look at the benefits offered by Public Provident Fund (PPF):
Tenure: PPF is an attractive long-term investment instrument with a deposit tenure of 15 years, and it provides a lock-in period of 7 years. After the completion of 15 years, an individual can extend it indefinitely in a block of 5 years.
Investment limit: One can start investing in a PPF account with a minimum investment of Rs. 500 and can invest up to a maximum of Rs. 1,50,000 in a financial year.
Tax Saving: One of the major advantages of PPF investment is that it provides an opportunity to gain tax benefits under EEE (exempt, exempt, exempt) format. This means that the interest offered under the PPF account is applicable for a tax deduction. Moreover, the contribution made towards the PPF accounts up to a maximum limit of Rs.1.5 lakh is also eligible for tax exemption U/S 80C of the IT Act. The withdrawals made towards the PPF account are also tax-free under wealth tax.
Deposit Frequency: Individuals can contribute to the PPF account at least once a year for 15 years.
Mode of Deposit: The contribution to the PPF account can be made by cheque, online fund transfer or through a demand draft.
Nomination: An individual can choose a beneficiary either at the time of opening an account or subsequently.
Fixed Deposit (FD) Vs Public Provident Fund (PPF)
Let’s take a look at the difference between PPF and FD based on different parameters-
| Parameters | Fixed Deposit (FD) | Public Provident Fund (PPF) |
|---|---|---|
| Issuing Authority | Banks and NBFCs | Government of India |
| Minimum Deposit Amount | Rs. 100- Rs.1000 | Rs. 500 |
| Liquidity | Moderate Liquidity | Low Liquidity |
| Tenure | 7 days- 10 years ( 20 years in case of some banks) | 15 years (can be extended in a block of 5 years) |
| Eligibility | HUFs, Residents, Corporations, Trusts, Firms, etc. Including NRIs | Indian Residents |
| Joint Account | Allowed | Not Allowed |
| Interest Rate | The interest rate applicable on FDs ranges from 2.90% to 6.5% | Currently, the interest rate applicable on PPF accounts is 7.1% |
| Loan Against Deposit | Available | Available only after the completion of 3 years from the date of initiation |
| Premature Withdrawals | Allowed for certain FD types | Allowed after the completion of 5 years of the account from the date of opening the account |
| Tax on Interest Earned | Taxable | Fully exempted from income tax |
| Tax Benefit on Deposit Made | Only tax saving FD offers tax benefits up to Rs.1.5 lakh U/S 80C of IT Act. | The contribution made towards the PPF account up to a maximum limit of Rs.1.5 lakh is applicable for tax deductions U/S 80C of the IT Act. |
Wrapping it UP!
In conclusion, both a public provident fund (PPF) and a fixed deposit (FD) can be good savings and investment options, depending on an individual’s specific financial situation and goals. PPFs offer a variable rate of interest that is set by the Indian government, while FDs offer a fixed rate of interest for a set period of time. Both types of accounts can provide tax benefits and the potential for earning interest on your savings, but there are some differences between the two that investors should consider before making a decision.
