FD or PPF? Which is Best for Long-Term Savings? Complete Comparison of Interest Rates and Tax Benefits

FD vs PPF: Investors often look for stability and secure returns when choosing investment options. In India, Fixed Deposits (FDs) and Public Provident Fund (PPF) are two popular investment instruments for risk-averse investors. Both schemes are beneficial for long-term wealth creation as they offer assured returns with minimal risks.

However, these two investment options differ in interest rates, tenure, taxation, and other features. Therefore, choosing between the two often leaves investors in a dilemma. Let’s take a look at the key factors you should consider before choosing between FD and PPF for long-term rewards.

What is a Fixed Deposit (FD)?

In a fixed deposit, you deposit a certain amount of money for a fixed period at a predetermined interest rate. The interest rate is fixed, so you know exactly how much you’ll earn when it matures. You can opt for monthly, quarterly, or annual interest, or get it at the time of the FD’s maturity. Interest rates generally range between 6% and 8% across top banks and differ depending on the tenure.

What is a Public Provident Fund (PPF)?

The Public Provident Fund is a government-backed long-term savings scheme designed to help investors save for the future, especially for retirement. It has a lock-in period of 15 years, which can be extended in blocks of 5 years each. The government decides the interest rate for specific quarters in a financial year. Currently, the PPF interest rate is 7.1% per annum.

Which is Better Based on Goals?

• Short-to-Medium Term Goals: If you are looking to invest for short-to-medium term goals, then opting for an FD could be a suitable choice. These are flexible, offer fixed returns, and can be withdrawn anytime (subject to certain conditions).
• Long-Term Goals: On the other hand, PPF is meant for long-term goals like retirement or children’s education. Its long lock-in period makes it ideal for such objectives.

Taxation and Investment Limits

A crucial difference lies in the taxation rules.

• FD: The interest earned on FDs is taxable. You have to pay tax on it according to your applicable tax slab. There is no upper limit for FD investments.
• PPF: On the other hand, the interest earned and the maturity value in PPF are completely tax-free. However, you can only invest up to ₹1.5 lakh in a PPF account per financial year. A minimum deposit of ₹500 is necessary in a financial year to keep your account active.

Investment Growth: An Example

Let’s see how an investment of ₹1 lakh per year in PPF for 15 years and a lump sum investment of ₹1 lakh in an FD could grow.

• ₹1 lakh per year in PPF:

  • Interest rate: 7.1% per annum
  • Tenure: 15 years
  • Invested amount: ₹15,00,000
  • Total return: ₹12,12,139
  • Total value: ₹27,12,139

• ₹1 lakh lump sum in FD:

  • Interest rate: 7% per annum
  • Tenure: 15 years
  • Invested amount: ₹1,00,000
  • Total return: ₹1,83,182
  • Total value: ₹2,83,182

To conclude, both FD and PPF could be suitable for investors looking for secure returns. It is advisable to evaluate the interest rates, taxation, and other factors before picking one of the two options.

(Disclaimer: This article is for informational purposes only. Please consult a financial advisor before making any investment decisions.)