Fixed deposit (FD) vs Public Provident Fund (PPF)

Whether it is to plan for your retirement or building an emergency fund for a rainy day, savings are an important aspect of our lives. For decades, India has been a nation of savers. Most of us aim to spend less than our incomes and save the maximum amount to invest smartly and further grow our savings. Fortunately for us, we have plenty of good investment options to choose from.

In this blog, we are going to look at two such popular investment tools namely PPF schemes and fixed deposits. We then look at the features and benefits of both, compare PPF v/s FD and decide which one is the better pick.

Fixed deposits schemes are low-risk investment instruments offered by banks and NBFCs. They serve as a great tool to grow your savings. You can choose to deposit a lumpsum amount as per your financial capacity and select a tenure as per your convenience. Your deposit starts earning a pre-decided rate of interest. This rate of interest remains unaffected by market fluctuations and the money is guaranteed on your deposit.

Fixed deposits offer the following features and benefits:

• Flexible tenure:

  Based on your investment goals, you can either opt for short-term or long-term fixed deposits. The tenure can range from anywhere between 7 days to 10 years.

• Guaranteed returns:

  The FD interest rates do not depend on the market situations and remain fixed at the rate you booked the FD. This ensures guaranteed returns on maturity.

• Higher gains:

  Cumulative FDs compound the interest on a monthly, quarterly or half-yearly basis. This guarantees higher gains on the principal amount.

• Regular source of income:

  For some FDs, you get the option of monthly payouts that can act as a steady source of income.

• Benefits for senior citizens:

  Most banks offer higher fixed interest rates on FDs for senior citizens.This can help them accumulate larger savings.

• Tax Saving:

  Tax-saver fixed deposits can help you bring down your income tax liability. You can claim a tax exemption under Section 80C of the Income Tax Act, 1961 for a sum of up to ₹1,50,000. Furthermore, it falls under the Exempt-Tax-Exempt category.

There are two modes of opening a fixed deposit account - online and offline.

Online process

The pros of opening an FD account include easy payment, less time-consuming, easy closure and quick renewal. Here is the online procedure for opening an FD account:

• Visit the website of the NBFC or the bank you want to open an FD account with.

• Log in with an existing ID or create a new login ID.

• Choose the open FD account option.

• Provide required details such as tenure, nominee, principal amount, etc.

• Confirm the details and make the payment through net banking.

• Remember to download the receipt for future references.

Offline Process

You can visit your nearest bank branch and fill out an application form for opening an FD account. If you have an already existing account with the bank, you need not submit the KYC documents again. However, in case of a new account, you must take all the necessary documents for identity and address proof to complete your KYC.

Let us understand how fixed deposit interest is calculated:

The FD interest rate formula is listed below

A = P(1+r/n)^n*t

Where,

A is maturity amount

P is the principal amount

r is the rate of interest

t is number of years

n is compounded interest frequency

You can always use an online FD calculator to know your interest/returns within a few minutes.

For the uninitiated, Public Provident Fund means an investment-cum-tax-saving instrument backed by the government. It was introduced over 50 years ago by the Ministry of Finance and continues to be an preferred investment option even today. Since PPF is guaranteed by the government, it is completely secure. You can opt for a PPF from the Indian post office or a designated bank that offers the same.

Here are some of the primary features and benefits of the Public Provident Fund Scheme:

• Tenure:

  PPF has a minimum tenure of 15 years. It can be extended in blocks of 5 years if you wish.

• Investment limit:

  PPF minimum amount for investment starts from ₹500. The maximum amount in PPF that can be invested is ₹1.5 lakhs in a financial year.

• Tax-saving:

  Investments made under PPF are eligible for tax deduction up to ₹1.5 lakhs per year inclusive of all investment instruments under Section 80C of the Income Tax Act, 1961.

• Deposit frequency:

  Individuals must deposit into their PPF account at least once in a year for 15 years.

• Mode of deposit:

  Individuals can make deposits into their PPF accounts via cash, cheque, online fund transfer or through a demand draft.

• Nomination:

  When you open a PPF account, you get the option to make a nomination either at the time of opening the account or subsequently.

• Government-backed:

  Since PPF is backed by the government, it ensures a risk-free return along with complete capital protection. The element of risk is very minimal.

You can open a PPF account in any post office or designated banks. Individuals are required to fill the application form and submit the necessary documents to open the account. Plus, you can transfer the account from the post office to the bank's branch of your preference by submitting a request for the same.

As per PPF Rules, PPF interest is calculated every month and credited into your account at the end of the financial year. Interest to be accrued on deposits is compounded yearly.

When it comes to FDs, they have a very flexible tenure. It starts from 7 days and goes up to 10 years. Only tax-saving FDs have a lock-in period of 5 years. For the rest, investors can choose the investment tenure as per their financial needs.

On the other hand, PPF has a lock-in period of 15 years. However, partial withdrawals can be made after the completion of six years (i.e. from seventh year) from the end of the year in which you made the initial investment. Moreover, you can only withdraw an amount that is lower of the two - 50% of the balance at the end of the fourth financial year or 50% of the balance at the end of the preceding year. Compared to FDs, they offer lesser investment flexibility.

Let us compare PPF v/s FD loan availability:

• Loan against fixed deposit:

  You can avail a loan against FD at any point in time. The top banks offer a loan in the range of 85% to 90% of the fixed deposit amount. In case the borrower fails to repay the loan, the banks can recover it from the fixed deposit amount which acts as collateral security.

• Loan against PPF:

  Public Provident Fund loan is available only from the 3rd financial year of investment and till the 6th year after opening the PPF account. The loan amount is restricted to 25% of the balance available in the PPF account at the end of the 2nd year preceding the year in which the loan has been applied. The loan has to be repaid within 36 months of availing it in a maximum of 36 EMIs. You can take a second loan before the end of the 6th financial year provided your first loan is fully settled.

Let us compare both the investment instruments i.e. PPF and FD to analyze which option is better:

Both FD and PPF are good options for risk-averse investors. PPF is preferred by people who are looking to save taxes along with investing for the future. Due to the government backing, the security it provides is unmatched. Also, the fact that the interest you earn is also tax-free adds to its attractiveness However, it comes with an extremely long lock-in with limited withdrawal options, that too from the 7th year.

FDs on the other hand are comparatively more liquid and give you flexibility of deciding the tenure. The tax-saving FDs have a lock-in of 5 years, which is much lesser than PPF. But FDs go carry some risk and also the interest you earn is taxable.

So, if you are ok with a 15 year lock-in then PPF can be a good option keeping all things in mind.