Fixed Deposits

Fixed Deposit(FD) Vs Public Provident Fund(PPF): Which Is Better?

By admin
25 October 2024
6 mins read

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Fixed Deposit(FD) Vs Public Provident Fund(PPF): Which Is Better?

Both Public Provident Funds (PPF) and Fixed deposits (FD) are safe and lucrative investment vehicles.

They yield modest but guaranteed returns in the long term and also offer tax benefits. So, it is no wonder countless investors, including those with considerable market portfolios, continue to invest in both PPF and FDs.

If you want to generate returns in a risk-averse manner, these are the top instruments to opt for. However, they do have specific differences. Learning about these differences can help you compare and decide which one is better for you. So, let us dive in!

FD vs PPF- Key Differences

Difference Parameter	Public Provident Fund (PPF)	Fixed Deposit (FD)
*Purpose*	A PPF doubles up as an investment cum tax saving instrument. It allows investors to deposit a lump sum annually or small amounts each month.	Offered by various financial institutions, FDs allow you to invest a lump sum and earn guaranteed returns on it. Unlike PPF, you can only invest a lump sum in a fixed deposit. If you want to start with small amounts, you'll have to open different FDs.
*Liquidity*	The PPF is relatively less liquid than a fixed deposit. A PPF account comes with a lock-in of 15 years when you open it. After 15 years, you can make partial or full withdrawals, depending on your requirement.	FDs are more liquid than PPFs, even though they come with a soft lock-in. If need be, investors can break an FD before maturity by paying a nominal fee and only losing the future interest it would have earned.
*Tenure*	The minimum tenure of a PPF deposit is 15 years.	An FD tenure can range anywhere between a few days to several years, depending on what a financial institution offers.
*Deposit value*	The minimum PPF deposit value stands at Rs. 500. However, you cannot deposit more than Rs. 1.5 lakhs annually in your PPF account.	Typically, investors can start an FD for as low as Rs. 500. Some institutions may set the limit even lower. Also, there is usually no upper limit for an FD deposit.
*Tax benefits*	You don't have to pay any tax when you partially or fully withdraw funds from your PPF account. However, the amount you deposit into your PPF account must be shown as tax-deductible under Section 80C when filing your Income Tax Return or ITR.	You can opt for a tax rebate on fixed deposits of up to Rs. 1.5 lakhs under Section 80C of the ITA. The rest of the amount is subject to TDS at 10% per annum.
*Issuing authority*	The Central Government is the primary issuing and guaranteeing authority for PPF.	Several private and public financial institutions, and companies and corporations, can issue a fixed deposit.
*Interest pay-out*	The PPF interest is paid on the 31^st of March every year in the investor's PPF account itself. After 15 years, they can manually withdraw the interest or principal amount whenever they want.	Depending on your FD opening conditions, a financial institution might pay interest at a fixed interval or at maturity. The interest here automatically gets credited into your linked bank account.
*Overdraft facility*	You can take a loan or overdraw on your PPF account only after the 3^rd financial year of opening it.	You can usually opt for the overdraft facility on your fixed deposit as soon or within a few months of opening one.

Interest Calculation for FDs and PPFs

Before making an investment decision for FDs or PPFs, it is important to understand how the interest rate works on these.

In the case of FDs, there are two ways to calculate the interest on your investment- simple interest and compound interest. As for PPFs, the interest earned on the deposit is compounded once a year, and the interest amount is set for all the deposits made in this account.

To get an estimate of your interest earnings and total earnings at maturity, you can use online tools like the FD calculator and PPF calculator. These are free to use and eliminate the need to do complex manual calculations to determine the maturity amount. All you need to do is enter basic information such as investment/deposit amount, PPF or FD interest rate, and tenure to estimate your maturity amount.

Benefits of FD vs PPF

Here are a few benefits of PPF vs FD that you must consider before investing-

Benefits of FD

Safe investment option regulated by financial institutions
Assured returns independent of market fluctuations
FDs offer the flexibility to choose a suitable tenure
FDs offer higher interest rates than savings accounts
Highly liquid investment that can be withdrawn prematurely
Option to invest in tax-saving FDs for tax benefits under section 80C
Ability to borrow loan against FD

Benefits of PPF

Promoted long-term savings with a lock-in period of 15 years
Highly secure as PPF investments are backed by the government
Offers higher interest rates than many fixed-instrument investments
Loan facility against PPF
The interest rate is declared quarterly and remains fixed for the entire tenure
Highly stable as PPF returns do not depend on market fluctuations.

Which to pick?

Consider a fixed deposit if you're looking for a short-term and relatively more flexible investment option. But, if you wish to keep your funds safe in a long-term instrument with the benefit of tax savings, go for a PPF. Most risk-averse investors diversify their corpus by investing in both instruments.

Before you go

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FAQs

Which is better, PPF or FD?

PPF is suitable to meet your long-term goals with stable returns, while FD provides fixed, secure returns over shorter periods. The choice depends on your investment goals, liquidity needs, and tax-saving preferences.

What is the difference between a bank and a firm fixed-income investment?

Bank fixed-income investments, like FDs, are low-risk and offer assured returns. Firm fixed-income investments such as corporate bonds or corporate FDs feature potentially higher returns but increased risk depending on the company's creditworthiness.

Can I extend the life of my PPF account?

You can extend your PPF account in 5-year increments after the initial 15-year period.

Is PPF better than a fixed deposit?

PPF generally offers better long-term returns with tax-free interest and government backing, but FDs provide fixed returns over a flexible tenure, offering more liquidity. PPF is better for long-term savings, while FDs suit short-term goals.