FD and PPF - Comparison

The investment opportunities can widely be divided into 2 broad categories - the instruments that provide market-linked returns and the instruments which offer fixed returns. When we talk about stable and fixed returns, the related instruments do not possess any market risks, unlike the market-linked options. The goal of fixed investment options is to prioritize the security of the deposits, whereas market-linked options aim at growth. Both PPF (Public Provident Fund) and Fixed Deposit (FD) fall under the category of fixed returns investment. Now the query arises about what is the difference if both of them belong to the same category?

To understand more about both options and make an informed and clever decision, let us start with the article.

What is Fixed Deposit ?

An FD often referred to as a term deposit, is an investment option that offers the depositor the opportunity to safely park their funds and earn interest on it too which is higher than the saving bank interest. As the name tells, the returns, as well as the deposit sum, stay fixed for a specific tenure in an FD account. FD is available in all the commercial as well as small finance banks, post offices, along with the NBFCs (Non-banking Financial Companies).

Who Should Prefer FD ?

Depositors who are looking for a next to nothing risk carrying option can go forward with an FD. The returns are pre-fixed and a change in market scenarios won’t hamper the returns of an existing customer. Amidst the pandemic, where the market has been highly volatile, if one isn’t ready to wet his feet in high or moderate risk, they might want to consider investing in FDs. However, corporate FDs would weigh light, when compared to bank FDs where it will carry Rs. 5,00,000 of deposit insurance coverage by DICGC. Therefore, looking at the current situation, one can consider putting his funds in a bank.

What is PPF ?

PPF (Public Provident Fund) is an investment-cum-tax-saving instrument backed by the Indian Government. This scheme was launched by the MoF (Ministry of Finance) more than 5 decades ago and it is still popular among depositors who have a low-risk appetite and like to stay away from market-linked risks. Since PPF is assured by the government, it is 100% safe and secure. Although this is a flagship product of the Government, some of the major commercial banks also offer this scheme as one of their products. PPF fetches more returns than the savings or current bank accounts and fixed deposits as well.

Who Should Invest in PPF ?

If an individual currently does not have a lump sum amount to invest and a risk-less avenue is the one that one is looking for with good returns, then PPF will be an ideal choice. However, unlike a Fixed Deposit, PPF initiates with a 15-year lock-in period. Therefore, if one has no problem with regularly keeping a portion of savings locked for 15 years, then PPF is an ideal scheme. The interest rates are guaranteed with mostly ranking higher than FD rates by leading commercial banks.

Interest Rate Calculation

In the case of FDs, there are two ways in which it is calculated, viz. simple interest or compound interest. To get an estimate of the maturity amount, there are tools like PPF Calculator and FD calculator available. It should be kept in mind that the amount calculated by these calculators is only indicative and not fixed.

As far as we talk about PPF, interest to be accrued on funds is compounded yearly. This is absolute for all deposits made in this savings scheme.

DIFFERENCE TABLE

PARAMETERS	FIXED DEPOSITS	PUBLIC PROVIDENT FUND
Issued By	Banks and NBFCs	India Post and some authorized banks like ICICI and SBI
Eligibility	Residents, Trust, HUF, Firms, etc including Non-Resident Indians (NRIs)	Residents of India Only
Joint Account	Allowed	Not Allowed
Time Period	7 days - 20 years	15 years (extendable in a block of 1 or 5 years thereafter)
Deposit Amount (Minimum)	Rs 100 - Rs. 1000	Rs. 500
Liquidity	Moderately Liquid; Premature withdrawals allowed in certain types of FD	Low Liquidity; premature withdrawals allowed every year from 7th financial year
Interest Payout	Depends on the choice of investor (credit to the linked bank A/c at regular period or on maturity) (3% to 7% p.a. approx)	Paid on 31st March of every FY (7.9% p.a.)
Changes in Interest Rates	No definite pattern	Indian Government quarterly announces FD rates
Loan against Deposit	Available	Available only after 3rd FY
Taxation of deposits made	Tax exemption upto Rs. 1,50,000 under section 80C on tax-saving FDs of more than 5 years	Deposits qualify for deduction as per IT Act
Taxation of interest accrued	Taxable as per the income tax slab of the investor	Fully exempt from Income Tax

PARTIAL Withdraws

With long term investment instruments, the goal is to accumulate and compound savings. Hence, the policy for withdrawing money is rigid and strict. PPF has a lock-in period of 5 years. No withdrawals are allowed until the specified period passes. Moreover, the amount that can be withdrawn with a PPF account is also capped.

There is less rigidity with FDs when it comes to withdrawing money. One can withdraw any sum whenever they need to with certain penalties. If one is willing to close the account prematurely, it can be done.

Tax Benefits

Seeking out tax-reducing investment instruments is a crucial part of financial planning. Both PPF and FDs offer tax benefits u/s 80C of the Income Tax Act, 1961, but PPF offers additional benefits. For FDs, deduction up to a limit of Rs. 1,50,000 can only be claimed on FDs with a minimum lock-in period of 5 years.

The interest amount earned through Fixed Deposits is taxable, ranging from 0–30% depending on which income tax bracket one falls in. On the other hand, PPF falls under the EEE (Exempt-Exempt-Exempt) status. PPF offers deductions on deposit amounts up to Rs. 1,50,000, tax-free returns, and no wealth tax.

How to Initiate An FD OR PPF ?

Depositors have the option of choosing between two alternatives of Fixed Deposits, Bank FDs and Company FDs. Bank Fixed Deposits can be initiated with any bank which offers this facility with benefits including lock-in periods to suit individual needs, an overdraft facility, etc. All an investor has to do is fill out the application form and submit it to the bank, along with the required documents. Whereas, Company FDs are offered by corporate firms wherein investors can deposit money with the company for a fixed tenure. These Fixed Deposits offer a higher interest rate but are considered riskier. Company FDs can be opened easily by filling out the application form and providing the required documents.

A PPF Account can be initiated in Indian post offices and selected nationalized banks. Investors need to fill out the application form and submit the required documents to initiate this account.

CRUX

It takes a lifetime of effort to earn money but a single decision of recklessness can see it disappear. Investing in PPFs or FDs ensures that one’s efforts and hard work don’t go in vain and the fund continues to grow stronger so that it can be there for unavoidable emergencies and circumstances. The benefits offered by both PPFs and FDs are unique, and not investing diligently could very well indicate the start of a rapid downhill journey.