Difference between FD and PPF

The investment instruments can broadly be divided into two categories – the investment options that provide fixed returns and investment options that provide market-linked returns. When we talk about fixed returns, the investment instruments are stable and do not have any market risks, unlike the market-linked instruments.

The goal of a former investment instrument is to prioritize the security of the savings, whereas the latter selects the growth. Both Fixed Deposit (FD) and Public Provident Fund (PPF) fall under the category of fixed returns investment. Now the question is what is the difference between these two investment options when they fall under the same category? Well, the answer to this question is mentioned in this article and to understand the same let us start with the definition of these two:

What are FD and PPF?

• Fixed Deposit (FD): FD or fixed deposit is one of the most popular investment instruments in India. The reason for its popularity is its interest rate and guaranteed returns. The FD interest rate is higher than a regular savings account and generally ranges between 8 to 9%, which depends on banks. The FD interest rate does not change at the time of market volatility and financial crisis. In addition to this, you can easily open a fixed deposit account.
• Public Provident Fund (PPF): PPF is considered as one of the secure and safest investment options. The money gets locked in for 15 years in a PPF account and compound interest on it, which is free of tax. Moreover, after completion of 15 years, one can extend this plan for five more years. With the help of PPF, one can easily build a corpus for the education of his/her child. Currently, the interest rate offered for PPF is 7.1%. One can easily open a PPF account in a nearby post-office or bank. Some banks also provide the facility of the online opening of PPF. The minimum amount that one needs to deposit in this account is Rs.500 whereas the maximum amount is Rs.1, 50, 000 in one financial year. For a minor his/her father or mother can open a PPF account. In addition to this, both the parents are eligible to open PPF account separately for the same minor.

Features of PPF vs Features of FD

Public Provident Fund is a government-based investment instrument for investment planning for the long term. One needs to maintain the PPF account by paying its annual premium. One can use PPF as a retirement fund or for the education of his/her children. This is because it has a long lock-in period as compared to other investment plans.

Fixed Deposits on the other hand are the investment instruments wherein you can deposit a lump sum amount. The interest paid on an FD is higher than a savings account. The money invested in an FD is locked for a specific period and depends on the policy tenure. Once this money is invested, the deposited money starts to accumulate with the Return on Investment (ROI) for the policy duration. Unlike PPF, one can deposit money in a PPF account only once. To deposit again, one needs to open a new FD.

Tenure of PPF vs Tenure of FD

When we talk about PPF, the policy tenure is lengthy, generally of 15 years. The PPF does not offer any flexibility in the tenure, which is long. Therefore, PPF generally is used to accumulate the amount for retirement. It provides guaranteed returns and is one of the safest investment options.

Alternatively, the Fixed Deposits are flexible in their tenure. The investors of FD are free to choose the tenure as per his/her requirement. The tenure of FD ranges between seven days to ten years.

Interest Rate of PPF vs Interest Rate of FD

The investment planning generally involves comparing the Return of Investment (ROI) for various financial instruments to understand what will give better profit. The interest rate of FD ranges between 6% to 8% / year, which depends on the chosen bank. The FDs of the company attract a higher ROI, which can range between 10 to 13%. While the ROI of PPF is decided by the government of India and currently it is 7.9% / year.

Partial Withdrawal of PPF vs Partial Withdrawal of FD

The main goal of long-term investment instruments is wealth accumulation. Therefore, the policies to withdraw money from them are strict. The lock-in period of PPF is five years and no withdrawals are allowed until this period passes. In addition to this, the amount that one can withdraw from a PPF account is as well limited.

The Fixed Deposits give more control when we talk about money withdrawal. One can withdraw any amount any time he/she needs to. Moreover, if one wants to close an FD account prematurely, he/she can.

Tax Benefits on PPF vs Tax Benefits on FD

One of the crucial parts of investment planning is tax-reduction. Both PPF and FD offer tax benefits u/s 80C of the IT Act. However, PPF provides more benefits. For Fixed Deposits after five years of the lock-in period, the money that is invested in FD can easily be claimed for deduction with an upper limit of Rs.1, 50, 000.

The interest that is earned on FDs ranges from 0 to 30% depending on this bracket of income tax one falls. The PPF provides deductions on the deposit amount of up to Rs.1.5 lakh.

Investment Amount of PPF vs Investment Amount of FD

There is no limit on the maximum amount that one can invest in FD. Since FDs are on- time investment plans, most of the people invest a large amount in them. Alternately, PPF has a limit of Rs. 1, 50, 000 / year.

The facility of Loan on PPF vs Facility of Loan on FD

One can avail of the loan against FD. On cumulative FDs, the amount of loan can be 75% of the amount that is deposited in it. However, for non-cumulative FDs, the amount of loan is slightly lower and is around 60% of the total amount that is deposited. On the other hand, with PPF one cannot take a loan against it until the money is being locked-in for at least three years.

The Final Words:

One can select an investment instrument as per his/her current and future financial requirements. With wealth growth, protection of the hard-earned money is also necessary. On one hand, where FD is more flexible than PPF, the other hand, PPF is the best for accumulating corpus for future needs. So, the investor decides to select a plan as per his/her requirements and future needs.