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Both PPF and fixed deposits are great investment options? But to decide on a suitable investment for you, you should familiarize yourself with the difference between FD and PPF.
When you start the financial planning journey in life, you will find a multitude of options. Bank fixed deposits, mutual funds, government bonds, shares, etc., are some of the most common types of investments. Then there are various types of government schemes in which you can invest. These schemes also come with some special tax benefits, which have contributed to their popularity. For conservative investors, fixed deposits and PPF investments tend to eclipse most other investments because they are deemed mainly safe investments. So, let us find out what makes them popular and learn about the difference between PPF and FD.
Over the years, the government has introduced some schemes to encourage the habit of saving among people. One such small-saving scheme is the Public Provident Fund (PPF), introduced by the National Savings Institute in 1968. A PPF is an investment instrument that offers assured, risk-free returns to the investor. It can also help one make regular contributions towards building a retirement corpus.
If you are a youngster looking for avenues to invest your money, PPF could be a good start. Not only are your PPF deposits safe of any risks, but the returns earned are also exempted from taxation. Under the Income Tax Act, you can claim a tax exemption of up to Rs.150,000 on your PPF.
Moreover, there are other exciting features of PPF that make it a worthy investment. For instance, this type of investment is open to all Indians on an individual basis. You can open a PPF account with just Rs.100. However, you should deposit a minimum of Rs.500 in your account each year to keep it active. Also, the PPF scheme comes with a lock-in period of 15 years, thus making it a long-term saving option. You can deposit a minimum of Rs 500 and a maximum of Rs 1.5 lakh in a PPF account in one financial year.
Another popular savings tool is a Fixed Deposit (FD) account. In an FD, you can deposit a lump sum for a specific tenure of your choosing (as defined by the bank) and earn interest on the same. This is another safe and risk-free investment option as the returns are not market-linked (same as in a PPF). The interest rate offered on fixed deposits varies from bank to bank. Moreover, like PPF, you can also get tax benefits, provided you opt for the tax-saving five-year FDs that comes with exemptions under the Income Tax Act.
There are certain specific factors you should consider to analyse the difference between PPF and Fixed Deposits.
A PPF comes with a lock-in period of 15 years, and one can withdraw the entire amount on maturity. Also, there is the option of extending the tenure in blocks of 5 years after maturity. In the case of an FD, you can choose a term for the investment, and the deposit remains locked in for the duration. Most banks levy charges on premature withdrawal from fixed deposit accounts.
The minimum deposit for a fixed deposit is generally specified by your bank or lender. Usually, most banks allow an FD account opening starting with a nominal amount of Rs.5,000, with no specific cap on the maximum deposit amount. For PPFs, you can get started with just Rs.100. But, to ensure that your account is active and valid, you need to deposit a minimum of Rs.500 each financial year, whereas the maximum deposit limit per annum is Rs 150,000.
The tax benefit is another point of comparison for PPF vs FD. PPF is a standard tax-saving tool as you can claim a deduction of up to Rs.150,000 for your PPF contributions. This benefit is available to taxpayers under Section 80C of the Income Tax Act, 1961. Also, the interest earned on PPF is not taxable, and so is the total amount withdrawn on maturity. This benefit is, however, not extended to FD investments. Interest income on fixed deposits is taxable. But if you opt for a five-year tax-saving FD, you can avail certain tax benefits.
A critical point of difference between FD and PPF is the rule surrounding premature withdrawals. As mentioned earlier, PPF comes with a lock-in period of 15 years. This high lock-in period makes PPF a slightly less accessible investment, especially if you need instant liquidity. However, you can make partial withdrawals after completing seven years of investment. With FDs, you can withdraw your deposit at any time, making it a more liquid asset. But the bank may levy some penalty on premature withdrawals.
PPF and FD are regarded as secure investment solutions that are supported by the government. However, because PPF is supported by the government, it provides a little bit more protection. Regarding designation, both PPF and FD let you name a beneficiary who will get the money in the event of your premature death.
Although guaranteed returns are offered by both PPF and FD, interest rates may differ. PPF interest rates are often marginally higher than FD interest rates. However, depending on the state of the market, FD interest rates may change. To make an informed choice, it's critical to evaluate the interest rates provided by various institutions and take your investment horizon into account.
While the differences mentioned above between PPF and FD can help you choose your preferred investment options, one thing remains the same. You can open PPF accounts and fixed deposits online as well as offline. Let us look at the processes for the same.
You can open your PPF account at any designated bank branch or your nearest post office that offer a PPF account opening facility. The PPF account opening process can also be completed online, for which you need a savings account with the post office or designated branch. Here is a step-by-step guide to help you get started.
Like the PPF account, you can open your fixed deposits online as well as offline. For online FD creation, you need to ensure that you have a valid internet banking account. If you do, you can log into it, select the FD amount, tenure, and payment method between monthly, quarterly, and cumulative interest payment, and create the FD in minutes. You may also open the FD offline by visiting the bank and filling the FD opening form with the above details.
Now that we have compared PPF vs FD, you can choose your preferred investment option. The most significant advantage is that both these investment instruments are deemed safe and are not market-linked. As such, you can divide your corpus and invest in both. Remember that FDs are more liquid, whereas PPFs come with more extended lock-in periods. So consider all the above points before investing in PPF and FDs.
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