If you have to decide on an investment between the Public Provident Fund (PPF) and bank deposits, we suggest you go in for the PPF. Here are a few good reasons why PPF is better than bank deposits.
The interest rates on the Public Provident Fund is always likely to be better than bank deposits, although there is a revision every quarter.
Currently, PPF gives you an interest rate of 7.6 per cent, while you get a mere 6-6.5 per cent in public sector banks. In fact, banks like State Bank of India give you a maximum of 6.5 per cent on deposits currently. So, you are getting a clean 100 basis points or 1 per cent higher in a PPF. That is a huge differential.
In fact, the PPF is more secure than bank deposits.
Taxation on interest
Bank deposits are fully taxable. The interest earned on them is added to the total income of a person for the purposes of paying tax. The interest earned on the PPF is tax free.
So, if you are in the highest tax bracket, you need to reduce 30 per cent of your returns from bank interest received and hence your post tax returns drop. In PPF there is no such interest that is taxable, though you cannot place more than Rs 1.5 lakhs in the PPF every year.
Sec 80C Tax benefits
If you invest up to Rs 1.5 lakhs, you get tax benefits under Sec 80C for the PPF. Most of the bank deposits do not offer you this facility, unless it is the tax saving deposits. So, you save Rs 50,000 in the highest tax bracket, Rs 30,000 in the 20 per cent tax bracket and Rs 15,000 in the 10% tax bracket.
Helps to build retirement corpus
Due to its long tenure of 15 years, the PPF helps you to build a solid retirement corpus. The advantage of the lock-in for seven years is that it helps you to save money and you cannot withdraw easily, which is good in a way as it is a forced savings. This is not the case in bank deposits, where easy withdrawal may never allow you to save adequately for the future.
If you want to build a retirement corpus with interest that is tax free, the PPF is not a bad proposition over the bank deposit. Only worry is the long tenure. Service is also not an issue these days as banks help you to open a PPF. So, you do not have to run to the post office to open an account. Online transfers and payments are also possible with ease.
The one advantage of the bank deposit over the PPF is that it is more liquid. It can be en cashed before expiry, which is not available in the PPF.
Partial withdrawal is allowed only after 7 years in the PPF. Take this as a advantage or a disadvantage whatever you wish. Overall, the PPF is much better and there is little doubt about that.