Whether it is to create an emergency fund for a rainy day or to plan retirement, building a strong financial plan is imperative to secure the financial future of an individual and their family. When we talk about the secure investment options in India, then PPF and FD are considered popular choices of investment among investors. Both instruments are an ideal option of investment for risk-averse investors. However, deciding, which is a better option of investment can be a difficult task.
To help you make an informed decision here 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 avenues, 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:
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.
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.
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 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 of 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, which 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):
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.
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.
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 account 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.
Individuals can make a contribution 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.
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, Firm, 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!
Both PPF and FD are lucrative options of investment for risk-averse investors. Individuals who are looking for a long-term investment option along with the benefit of tax saving should consider investing in a PPF account. On the other hand, if you want to accumulate a fund for a short period of 5-10 years then you should consider investing in fixed deposits. The decision whether to invest in FDs or PPF entirely depends on the investment objective and future goals of an individual.