Public Provident Fund (PPF) Vs Fixed Deposit (FD) - Which Offers Better Tax Benefits, Expert Guides Through: Money Matters

What Is Public Provident Fund (PPF)?

The PPF is a government-backed savings scheme that offers long-term financial security. It's a favorite among investors looking for a safe, tax-saving investment. You can invest a minimum of Rs 500 and up to Rs 1.5 lakh per year in PPF, and the funds grow at a fixed interest rate, which is revised every quarter by the government.

One of the most attractive features of the PPF is that it is completely exempt from tax under Section 80C of the Income Tax Act. This means that the amount you contribute towards the PPF is eligible for tax deductions up to Rs 1.5 lakh per year. Additionally, the interest earned and the maturity amount are also tax-free. This triple tax benefit (exemption on contribution, interest, and maturity) makes PPF an ideal tax-saving tool for long-term investors.

What Is Fixed Deposit (FD)?

On the other hand, Fixed Deposits (FDs) are one of the simplest and most accessible financial products available. They offer a fixed interest rate over a predetermined period, which can range from a few months to several years. Banks and financial institutions offer FD products, and the rate of interest varies based on the tenure and institution.

FDs are not as tax-friendly as PPFs. While the principal amount you deposit in an FD is not subject to tax deductions, the interest you earn on the FD is taxable. The tax is deducted at source (TDS) if the interest exceeds Rs 40,000 (Rs 50,000 for senior citizens) in a financial year. The interest earned is added to your taxable income, and you are taxed based on your income tax slab.

Don't miss:5 Essential Financial Planning Tips For First-Time Homebuyers: Money Matters

Key Differences Between PPF And FD

1. Tax Benefits

PPF provides substantial tax benefits. Our expert Mr Amit Goel says, “PPF qualifies for tax deductions under Section 80C, with investments up to Rs 1.5 lakhs eligible for exemption. The interest earned and maturity amount are also tax-free.” In contrast, “Tax-saving FDs also qualify for deductions under Section 80C, with investments up to Rs 1.5 lakhs eligible. However, the interest earned is taxable”, says Mr Amit Goel.

2. Interest Rates And Returns

Mr Amit Goel explained that “PPF offers a fixed return of 7.1% per annum, with returns compounded yearly. Since it's a government-backed scheme, the risk is extremely low.” On the other hand, FD interest rates can vary depending on the bank, tenure, and prevailing market conditions. He further shared, “FD provides a fixed return ranging from 7.1% to 8.75% per annum, depending on the tenure. FDs are also low-risk, but returns may vary depending on the bank and market conditions.”

3. Lock-In Period

PPF has a lock-in period of 15 years, which means you cannot withdraw your funds before that, except under specific conditions (like medical emergencies). The long tenure encourages disciplined saving, but it may not suit those who need immediate liquidity.

In contrast, “Typically has a lock-in period of 5 years for tax-saving FDs, with some banks offering flexible tenure options. Loans can be availed against FDs, but may attract penalties for premature withdrawal”, says Mr Amit Goel

4. Risk And Safety

Both PPF and FD are considered safe investment options. PPF is backed by the government of India, making it virtually risk-free. Similarly, FDs are guaranteed by banks, with government insurance covering up to Rs 5 lakh per depositor.

Don't miss: EPFO Unveils New Death Benefits: 3 Key Changes You Should Know

Which One Is A Better Tax Saving Option?

Choosing between PPF and FD depends on your specific financial goals and tax-saving needs. Always make sure to consult a financial advisor before investing in PPF or FD. If you’re looking for a long-term, tax-efficient investment with the added benefit of earning tax-free returns, PPF is the better option. It offers guaranteed returns, tax exemptions, and a fixed tenure, making it a great choice for retirement planning and wealth accumulation.

However, if you’re looking for more flexibility and shorter investment periods, FDs may be a better choice. They provide regular income through interest payments and offer more liquidity, but the tax implications on the interest earned might reduce the overall benefit.

For more such stories, stay tuned to HerZindagi.

Image credit: Freepik