Why PPF is better than FD?

PPF Vs FD(fixed deposits) are both safe heaven for risk averse investors. But while beginning the investment one may want to understand about which is better PPF or FD? While comparing, PPF with FD then both are safe and provide fixed returns.

f But the major difference lies in taxation of Fixed Deposit and Public Provident Fund. PPF is completely tax free in nature, while the profit form fixed deposits are taxable.

What is ( FD)Fixed Deposit?

Fixed Deposits, commonly known as FDs, are simply a deposit scheme provided  by banks or financial institutions. It’s a popular choice for risk averse investors who wish to earn a fixed interest rate on their savings without any market risk.

Fixed deposit is a lump sum amount deposit scheme. Here, you deposit money for a fixed duration, which may range from a few months to several years.

Now FD interest rates differ from bank to bank. You get higher interest rate long duration deposits. But it remains constant throughout the tenure of the FD.

FDs are considered to be a low-risk investment option, as the rate of interest is guaranteed and not influenced by market fluctuations. 

You can also opt to withdraw your money before completion of duration also, but in such cases the bank may give you a lower interest rate than the original interest rate.

FDs are a simple, safe, convenient One time saving  option to earn a fixed interest rate with low risk.

TIP : Compare interest rate of different banks or NBFCs before making an investment option.

What is PPF?

PPF or  Public Provident Fund, is a long-term investment option offered by the Central government of India. It is a 15 year investment option for  people who want to save money for their retirement or other long-term financial goals.

The minimum yearly deposit amount is Rs 500 and maximum deposit limit is Rs 1.5 lac in a financial year. The current PPF Interest rate is 7.1% per annum. The interest rate is revised by the GOI every quarter.

is interest on PPF taxable?

PPF offers triple EEE advantage to the investor. As when you deposit 1.5 lac, you get tax deduction U/S 80C. The interest is tax Exempt  in nature ( no tax) and maturity amount is also tax free in nature.

Although PPF account matures after 15 years, it  can be extended in blocks of five years after the maturity period. 

PPF is a safe and secure 15 year Govt. backed scheme, with minimum deposit of Rs. 500 and maximum investment amount is 1.5 lac in a FY. One has to make at least one contribution yearly for 15 FY.

PPF and FD difference

Features of FD

Here are the key features of Fixed Deposits (FDs):

1. Investment Tenure: The investment duration available is from 7 days to years.One can choose duration as per comfort level and own personal needs.
2. Fixed Interest Rate: FDs provide  a fixed interest rate, which is agreed upon at the time of investment and remains constant throughout the tenure of the FD.
3. Minimum Investment Amount: Usually the minimum investment amount is kept low, so as to make it accessible to all sorts of investors.
4. Premature Withdrawal: Investors can withdraw their FD investment before the maturity date, but the interest rate applicable on the premature withdrawal may be lower than the original interest rate.
5. Tax Implications: The interest earned on FDs is taxable in nature.The profit is added to income and taxed as per the investor’s tax slab. TDS (Tax Deducted at Source) is applicable if the interest earned exceeds a certain limit.
6. Risk: FDs are considered to be low-risk investments as they offer a fixed rate of return and are not affected by market fluctuations.
7. Automatic Renewal: If an investor does not withdraw the investment after maturity than the investment amount is reinvested for the same tenure at the prevailing interest rate.

FD or PPF which is best ?

Let’s compare PPF vs 5 year FD and understand it with Mr. Bestii Singh Journey.

Bestii Singh Journey to FD Vs PPF

Fixed Deposit

Suppose Singh want to make deposit 1.5 lac for 5 years in fixed deposit. So to do this he visit the bank branch and deposit Rs. 1 lac for 5 year @ 7%.

He will get tax deduction U/S 80C for 1.5 lac.

So at maturity Bestii will get Rs. 2,03,894. Now the profit of Rs. 53,894 is taxable in nature. This interest will be added to his income and taxed as per his tax slab rate of 10/20/30 percent.

Ok let’s assume hypothetically that he contribute every year( purchasing a fixed deposit every year) -Just to be fare while calculating :).

the maturity amount will be 40,33,206 but the interest of 17,83,206 is taxed as per tax slab of Mr. Singh. so the take home can be ( if interest is taxed @ 10%)

22,50,000+16,04,885=Rs. 38,54,885

( if interest is taxed @ 20%)

22,50,000+14,26,564=Rs. 36,76,564

( if interest is taxed @ 30%)

22,50,000+12,48,244=Rs. 34,98,244

Please NOTE: the FD interest is taxed on yearly basis. The above calculation is done on maturity amount only. So the original maturity amount from FD ( after 15 year) will be lesser than this.

Public Provident Fund

Now suppose, Mr. Bestii starts to invest in PPF. Since PPF is a 15 year scheme, he has to contribute for 15 years. PPF Deposit limit is Rs500 ( minimum) and Rs 1.5 lac ( maximum).

He decides to contribute 1.5 lac each year for 15 years @ 7.1% . So his contribution amount will be 22,50,000 and the maturity amount will be 40,68,210.

Now in case of PPF, his contribution of 1.5 lac will get tax benefit U/S 80 C every year. His interest and maturity are tax exempt in nature.

PPF vs FD – Which is better?

Feature	PPF	Fixed Deposit
Investment Duration	15 year Scheme	7 days -10 Years
Deposit Frequency	At least one contribution Each FY	One time deposit Scheme
Safety	Safe, Backed by GOI	Safe, Floated by banks, NBFCs
Minimum Contribution	Rs. 500	Rs. 1000
Interest Rate Revision	Revised every quarter	Fixed in the beginning
Premature Withdrawal	Possible after 3rd FY	Allowed with penalty
Tax Benefit U/S 80C	Contribution up to 1.5 lac	Contribution up to 1.5 lac ( Only in 5 year FD)
Interest taxability	tax free in nature	Taxable – Interest is added to income & taxed as per tax slab
Post tax Return	EEE Advantage – the deposited amount, interest & maturity are tax exempt	Low

FAQ

Is PPF Account safe or not?

PPF account is backed by Central Govt. Of India, therefore completely safe.

Is PPF Safe than FD?

PPF is backed by GOI Whereas FDs are backed by Deposit Insurance and Credit Guarantee Corporation (DICGC). The DICGC, which is a subsidiary company of the Reserve Bank of India (RBI), offers a cover up to ₹5 Lakhs for each fixed deposit account. Therefore both are safe. Yet, PPF outperforms FD in terms of taxation.

Is PPF better than MF?

PPF is a fixed income product backed by GOI. PPF is a 15 year scheme, therefore a long commitment. But Mutual fund offer higher liquidity and return may be higher in longer duration. PPF is suitable for risk averse investors whereas MF is suitable for low to high risk takers.

How much will I get if I invest 5000 per month in PPF?

If you deposit 5000 monthly for 15 years @7.1% then the maturity value after 15 years will be 16,08,120. The total deposit made is 9 lac.

Is PPF interest rate fixed for 15 years?

No, PPF interest rate is not fixed for 15 years. The rate of interest is revised by the GOI every quarter. Thus PPF interest rate may or may not change every quarter.

Conclusion

Overall, the only difference between FD and PPF is , FDs offer more flexibility in terms of investment tenures and amounts, while PPF is a long-term investment option with fixed returns and a higher investment amount. It’s essential to choose an investment option that suits your financial goals and risk tolerance.