PPF Vs FD: Which Can Be A Good Bet For My Personal Finance?

Fixed Deposit of Banks or NBFCs

A fixed deposit (FD) is an investment strategy that gives investors the opportunity to comfortably hold their investments and gain returns on it. The interest gained on a term deposit i.e. FD is often better if opposed to a savings account. As we all know that in a fixed deposit account, the interest rate, as well as the deposit amount, remains fixed for the entire term. At banks, commercial as well as small finance, and NBFCs (non-banking financial companies), fixed deposits are available. A fixed deposit can appear to be very appealing for those looking for a risk-free investment vehicle. Returns are determined at pre-fixed interest rates and there is no impediment to the interests of an existing customer due to changes in market dynamics.

In the middle of COVID-19, where the economy is so uncertain and unpredictable, if you're not willing to damp your heels in high risk, investing in a bank or corporate fixed deposit can be a secure bet. Fortunately, where a bank FD would provide up to Rs. 5 lakh of DICGC deposit insurance coverage, company FD will be comparatively lightweight in terms of guaranteed returns. We therefore encourage you to place your capital in a small finance bank FD where the interest rates are currently as high as 7.5%. FD will also allow you to save tax benefits up to Rs. 1.5 lakh in a year with a lock-in term of 5 years respectively.

Public Provident Fund

Public Provident Fund (PPF), funded by the Government of India, is a tax saving investment vehicle. As this fund is backed by the government of India, it is purely a risk-free choice among the investors who want to get assured returns along with tax benefits. Some of the major banks in India are now offering this scheme as their offering and one can open a PPF account at banks as well as post office. If you don't have a large amount to invest at present, and you're searching for decent returns is a risk-less path, then PPF can be a good bet for you.

That being said, unlike an FD, a 15-year lock-in term comes with PPF. Consequently, if you are all right to have a part of your savings blocked for 15 years on a regular basis, then PPF is suitable to you. The yields are promised and thus higher than FD rates of commercial banks as of now. For the current quarter of January 1 to 31 March 2021, PPF will fetch you an interest rate of 7.1% which is much higher than the FD rates if we compare it with the rates of the largest commercial banks.  

Difference between FD and PPF

Both Fixed Deposits and the Public Provident Fund can be taken into consideration for risk-averse investors. But which can be the best? Let's find out by differentiating both:

Maturity period: Public Provident Funds fall with a maximum period of 15 years, which is obviously an extremely long period. On the other hand, fixed deposits can be locked for terms ranging from 7 days to 10 years, based on an individual's requirements, thereby allowing more stability in preparing for the near future.

Interest Rates: The interest rate on PPF is set and revised by the Government on a quarterly basis. The current rate of interest on PPF is 7.1 percent per annum. The interest rates on fixed deposits are determined by financial institutions, and by doing a short survey, an individual may well have a shot to get a higher interest rate. Many small financial banks can provide you an interest rate of up to 7.5 percent, and you can get an interest rate of up to 9 percent on corporate fixed deposits currently.

Premature withdrawal facility: For PPF, premature withdrawal facility is allowed after 5 years of deposit. Some banks allow early withdrawals of fixed deposits, however, relying on their policy, they can charge a certain penalty in case of premature withdrawal.

Loan against deposit: Loans against the PPF can be issued from the third year onwards from the date of account opening. Most banks provide an overdraft option in the case of fixed deposits that may reach as high as 90 percent of the balance in the FD.

Taxation: Under Section 80C of the Income Tax Act, individuals can claim a tax deduction for such holdings, with both the Public Provident Fund and Tax Saving Fixed Deposits being liable for such exemptions. For both of these savings, the current cumulative deduction available is Rs 1.5 lakh respectively.

Maximum deposit amount: The overall amount that a person can contribute to PPF is restricted to Rs 1.5 lakh per year. But when it comes to fixed deposits the overall deposit limit is not restricted. Based on individual bank policy you can deposit in crores.

FD vs PPF: How can I calculate my returns?

Interest to be earned on investments is compounded annually as far as PPF is known. There are two ways in which it is measured in the occurrence of fixed deposits, via. Compound interest or transparent interest. There are methods such as the FD Calculator and PPF Calculator accessible at Goodreturns.in to get an estimation of the maturity amount. Both these tools are cost-free and can be utilised countless times to help investors determine the right choice for them at varying FD/PPF rates and maturity period.

How can I open an FD/PPF account?

Depositors have the alternative to choose from two types of fixed deposits, fixed deposits of banks and fixed deposits from companies. Bank Fixed Deposits can be opened by submitting the required KYC documents and application form at any bank. Most of the banks are also allowing online methods to open an FD account. Company Fixed Deposits are provided by corporations where depositors for a fixed amount of time can deposit money with the company. Company fixed deposits come with higher returns but are not risk-free until you go for a high rated company FD. It is easy to open Company Fixed Deposits by filling out the application form and submitting the necessary documents as well.

Our take

The selection between FD and PPF relies on the investor's requirements, so one can carefully consider the benefits and drawbacks of both instruments when considering between these two. Though PPF is an absolutely safe choice as it is backed by the government, it comes with a long lock-in duration of 15 years and also a premature withdrawal is only allowed after 5 years of continuous deposit. There is insurance of Rs. 5 lakh on bank FDs when discussing FD. In contrast to PPF, FD is a considerably more flexible alternative. Premature withdrawals, both partial and complete, can be used as per the rules of the bank or corporation. Consequently, PPF may seem effective if the intention is to hold the capital locked-in securely for a large couple of years. If you want a low-risk investment with respectable returns along with the convenience of closing the account early, FD is a smarter bet.

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