Difference between PPF and FD: Which is best for you?

The right investment plan is crucial for retirement planning, building an emergency fund, and achieving long-term financial goals. Smart saving is getting popular, and good investment options are available to suit diverse financial needs.

Fixed Deposits and Public Provident Funds are two popular low-risk investments with guaranteed returns. Both are popular with conservative investors looking for safety, but they offer quite different financial strategies suitable for different types of investors.

Here is a guide that highlights the difference between PPF and FD investments and shows the best tools for diversifying investment portfolios and earning higher assured returns!

All About Fixed Deposits

FDs are low-risk investments provided by banks and non-banking financial companies. They allow investors to invest money for a fixed tenure and preserve capital by earning high-interest returns.

As soon as the money is deposited, it begins to earn at a certain interest rate. These deposits are safe from market fluctuations. Such investments become useful for saving money with a return in the absence of any fluctuations.

Fixed Deposit: Features and Benefits

Here are the features and benefits offered by a fixed deposit:

1. Diversified Tenure: Investors can choose a tenure as short as seven days to up to 10 years based on their requirements.
2. Guaranteed Return: The return from an FD is guaranteed, which makes the investment product safe for risk-averse people.
3. More Returns with Cumulative FDs: With compound interest, cumulative fixed deposits accrue every month, quarter, or semi-annually. Compounding allows the principal to grow over time and, therefore, yield much more returns at maturity.
4. Privilege Facility for Seniors: Many financial organizations offer a higher rate of interest to senior citizens.
5. Tax-Saving Benefits: Fixed deposits are tax-saving because they also provide a lock-in period of 5 years to investors. An investor can benefit from an investment of up to ₹1,50,000 under Section 80C of the Income Tax Act, 1961. The ETE framework applies to those FDs that qualify in the category of savings and give tax benefits on the invested amount.

Note: The information provided is for informational purposes only. PowerUp is not responsible for any errors, omissions, or outcomes related to the use of this information. 

About Public Provident Funds

The Public Provident Fund is a long-term investment scheme introduced by the Government of India. It emphasizes saving in small amounts and offers tax advantages. 

It offers capital protection along with guaranteed returns and is an attractive investment scheme for those who want to build retirement savings over time.

PPF accounts can be opened in designated banks or post offices across India. They are accessible to salaried employees, self-employed professionals, and even non-salaried individuals.

PPF Features and Benefits

The key features of the Public Provident Fund are:

1. Tenure: PPF is a long-term investment with a minimum tenure of 15 years.
2. Investment Range: The investment range under the PPF scheme is as low as ₹500 per year and as high as ₹1.5 lakhs a year.
3. Tax Benefits: PPF deposits benefit from tax deductions under Section 80C of the Income Tax Act, 1961. The benefit extends up to a maximum of ₹1.5 lakhs in every financial year. Also, PPF is considered an EEE product, which means the investment, interest accrued as well as maturity amount are exempted from tax.
4. Frequency of Deposits: To keep the PPF account active, there should be at least one deposit in every financial year.
5. Government-Backed Security: PPF ensures risk-free return with complete investment security. PPF is not susceptible to fluctuations and is most suitable for people looking for secure and stable savings.

Note: The information provided is for informational purposes only. PowerUp is not responsible for any errors, omissions, or outcomes related to the use of this information. 

PPF vs FD: Key Differences Between PPF and FD

Features	PPF	FD
Maturity	A PPF has a fixed lock-in period of 15 years, making it a long-term investment.	FDs have flexible tenures, ranging from 7 days to 10 years.
Loan Availability	In PPF, loans are permitted from the third to the sixth year of account holding, but the loan amount taken is restricted to up to 25% of the balance in the account.	In FDs, one can withdraw the loan against his FD anytime during its tenure, mostly up to 85%- 90% of the deposited amount, making FDs a more liquid instrument.
Interest Computation	The interest in PPF compounds annually, which is simple but powerful for long-term growth.	FDs offer more flexibility, with interest compounding monthly, quarterly, and even annually, depending upon the deposit plan.
Investment Limit	While a minimum of ₹500 is required annually to keep your PPF account active, there’s no strict minimum for contributions beyond this. However, the maximum investment is capped at ₹1.5 lakh per financial year	There are no particular minimum or maximum limits for FDs. However, for tax-saving FDs, the investment has to be capped at ₹ 1.5 lakh to gain tax benefits.
Tax Benefits	PPF is completely tax exempted under the EEE category meaning all contributions, and interest at maturity are tax-free.	FDs provide only tax benefits for tax-saving deposits declared under Section 80C, and interest earned is taxable. Hence, FDs are not as tax efficient as PPF.
Risk	The basic factor is the Government of India, which makes PPF almost risk-free with assured returns.	DICGC covers bank FDs up to ₹lakh, while anything more than that inherently carries a minimal risk, especially when involving non-banking financial institutes.
Withdrawal Flexibility	The flexibility of withdrawal is quite limited. Full withdrawal can only be done after 15 years. However, partial withdrawal is allowed from the 7th year of investment.	There is more flexibility regarding withdrawal as they permit premature withdrawal, subject to any penalty that the institution might levy and dependent on the terms of the FD.
Nomination Facility	Investors can create nominations at the time of opening or subsequently.	Nomination is available with ease for estate planning and transfer of assets.

Note: The information provided is for informational purposes only. PowerUp is not responsible for any errors, omissions, or outcomes related to the use of this information. 

PPF vs FD: Which One to Invest in?

FD and PPF are two highly preferred options for a risk-averse investor. Still, they meet two different objectives, so, let’s take a close look at each:

1. Why Choose PPF

PPF is a long-term investment instrument offered by the Government of India. It especially attracts those in search of tax savings and future investments with minimal risk. Even the interest earned in a PPF account is tax-exempt.

But its biggest negative point is a 15-year lock-in period, in which one can only make some partial withdrawals in the 7th year.

2. Why Choose FDs

FDs offer more liquidity and flexibility to choose between short-term and long-term tenures. Tax-saving FDs carry a lock-in period of 5 years, which is much easier to manage than PPF if medium-term liquidity is required. However, FD returns are taxable, and they carry minimal risk since only deposits up to ₹5 lakh are insured under the DICGC.

Investors must prudently choose the one that fulfils their short-term and long-term financial goals. They must look into their financial situation, future needs, and risk tolerance level to arrive at the correct decision.

Conclusion

Making a choice between PPF vs FD is critical for an investor. Each has significant features, advantages, and limitations. Understand the major difference between PPF and FD and choose which best suits your financial goals.

Knowing the difference between PPF and FD allows investors to make more informed and strategic decisions. This is integral to ensuring that savings grow steadily and securely over time.