Fixed deposit vs Public Provident Fund: Which is better?

Both Fixed Deposits (FDs) and Public Provident Fund (PPF) offer stable returns along with capital protection. However, there are some key differences between the two investment instruments that make one more suitable than the other depending on your goals and risk appetite. Let's take a deeper look at the pros and cons of fixed deposits and PPF.

PPF vs FD: Returns
 

Fixed deposits typically offer higher rates than PPF. Interest rates on FDs range from 3.5% to 8.5% p.a. [JV1] annually depending on the tenure. Seniors get 0.5% more interest on FDs.  The government sets the interest rate for PPF every quarter, which tends to be lower than bank FD rates. However, PPF interest is compounded annually and earns tax-free returns.

Over the long term, the benefits of annual compounding in PPF can outweigh the higher periodic interest offered by FDs. A 15-year investment in PPF is likely to generate higher total returns compared to multiple FDs of shorter durations.

PPF vs FD: Investment tenure
 

Apart from returns, another important factor to consider when looking at PPF vs FDs is the investment tenure. FDs are available for tenures ranging from 7 days to 10 years. Short-term FDs have lower interest rates. A PPF account has a fixed investment horizon of 15 years. Partial withdrawals are allowed after five years, but the account has to be kept active for the full term to avail maximum benefits.

PPF vs FD: Taxation
 

1)    PPF enjoys Exempt-Exempt-Exempt (EEE) status for taxation. Contributions of up to Rs 1.5 lakh annually are tax deductible under section 80C of the Income Tax Act, 1961. Interest and maturity proceeds are also fully tax-free. Customers[JV1]  become liable for TDS on FDs, if the aggregate interest that customers are likely to earn for all their deposits held across branches is greater than Rs.40,000/- (Rs.50,000/- for senior citizen) in a financial year. The effective post-tax return from FDs gets reduced for such investors.

So, when it comes to fixed deposit vs PPF, from a tax perspective, the benefits overwhelmingly tilt in favour of PPF compared to FDs for long-term wealth creation and retirement planning.

PPF vs FD: Withdrawals and loans
 

As mentioned earlier, partial withdrawals can be done from PPF after five years, subject to rules, but the money has to remain invested for 15 years. In case of FDs, premature withdrawals are allowed but interest rates may be reduced by 1% to 2% if the FD is closed before maturity. There is also no limit on how much of the FD amount can be withdrawn.

PPF rules also allow account holders to borrow against their PPF balance after three financial years. Some banks may provide loans against fixed deposits. However, this is not possible if you have opted for a five-year tax-saving fixed deposit or a non-callable fixed deposit.

So, in terms of liquidity needs before maturity, FDs score over PPF, as PPF has restrictions on withdrawals before 15 years.

PPF vs FD: safety and nomination
 

Both PPF and FDs with banks (including post offices) provide complete safety of capital since they are backed by the government (in case of PPF) or deposit insurance (for bank FDs up to Rs 5 lakh per bank).  PPF also allows account holders to nominate individuals who will receive the proceeds in case of the death of the account holder. This ensures hassle-free transmission to legal heirs. Nomination facility is also present in fixed deposits.

Therefore, in terms of ensuring payment/transfer of funds to dependents or nominees, PPF and FDs are equally safe.

Conclusion

PPF is well-suited for long-term goals 15-20 years away due to its mandatory long tenure, tax-free status, and benefits of annual compounding. FDs are a better option when safety, liquidity and regular payouts on maturity are priorities.

After considering the pros and cons of FD and PPF, you can consider investing in both options with amounts tailored to match your specific time horizon and risk profile. Opting for PPF for retirement and children’s education while using FDs for shorter-term goals such as buying a vehicle or planning a vacation for instance, provides well-balanced savings and returns over time.