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In case you are a conservative investor with a low tolerance for risk, you may be looking for safe investment options. There are two avenues that you can consider here, namely a fixed deposit (FD) and the Public Provident Fund (PPF). 

 

A fixed deposit is an investment plan offered by banks and Non-Banking Financial Institutions. It offers guaranteed interest on the amount deposited. On the other hand, the Public Provident Fund (PPF) is a savings-cum-tax-saving investment option launched by the Indian government. 

 

If you are not sure which of these two investment options to invest in, a detailed FD vs PPF comparison can help you make a more informed choice. Let’s first take a closer look at each of these investment options and then move on to figuring out which is better — PPF or FD.

What is a Fixed Deposit?

A fixed deposit, as the name indicates, is an account where you can deposit a fixed sum of money for a fixed tenor. This tenor can range from 7 days to 10 years for bank FDs, and from 1 to 5 years for FDs offered by NBFCs. Over the investment period, you earn guaranteed interest on your investment at the rate of interest fixed by the bank or NBFC.

 

Depending on when and how this interest is paid out, there are two main types of FDs, as outlined below.

 

  • Cumulative FDs:

In these fixed deposits, the interest is reinvested in the FD account and only paid out at maturity, after the completion of the investment tenor. This gives you the benefit of the power of compounding. 

 

  • Non-Cumulative FDs:

In non-cumulative FDs, the interest is paid out to you at frequent intervals. You can opt for monthly, quarterly, semi-annual or annual payouts. This facility helps you earn income on a steady basis. 

Who Should Invest in FD

A big part of resolving the FD vs PPF dilemma is figuring out which is the right investment option for you. In the case of a fixed deposit, you can consider investing in this option if you meet any of the following conditions. 

 

  • If you want to earn guaranteed interest on your investment

  • If you want some flexibility with your investment tenor

  • If you are looking for an investment avenue that can offer a regular source of income

What is a PPF?

PPF or Public Provident Fund is an investment option offered by the Indian government. It is also an extremely safe investment avenue since it has the government’s backing. Many banks also offer the facility to open a PPF account today. Here are the key features of the PPF investment option.

 

  • The rate of interest on a PPF account is decided by the government every quarter.

  • As of October 2022, the interest rate is 7.10% per annum.

  • You can open a PPF account with as little as ₹100.

  • To keep your account active, you need to invest a minimum of ₹500 in your PPF account each financial year.

  • The maximum investment limit per financial year is ₹1.5 Lakh.

  • You can make as few as 1 deposit or as many as 12 deposits during the year.

  • The lock-in period for a PPF investment is 15 years.

  • The amount invested in a PPF account during the year is eligible for tax deduction up to ₹1.5 Lakh.

  • The interest earned on the investment as well as the maturity proceeds are tax-free.

Who Should Invest in PPF

To compare FD vs PPF comprehensively, it’s also important to know if PPF is the right investment option for you. Investing in the Public Provident Fund may be suitable for you if you have any of the following requirements.

 

  • If you want to invest for the long term

  • If you are looking for tax-saving investments 

  • If you do not want any regular source of extra income currently

Maturity or Lock-in Period of PPF and FD

The lock-in period of investment tenor is a key parameter to consider if you’re comparing PPF vs fixed deposits. 

 

FDs have more flexible tenor options. If you open an FD with a bank, your tenor options range from 7 days to 10 years. In case of fixed deposit plans offered by NBFCs, the tenor can range from 1 year to 5 years. Only tax-saving FDs have a lock-in period of 5 years. 

 

In the case of PPF, however, the lock-in period of 15 years is non-negotiable. That said, partial withdrawals can be made after the completion of five financial years (excluding the first year) from the year in which you made the initial investment. Also, you withdraw up to 50% of the balance once per year. 

 

So, when it comes to FD vs PPF, fixed deposits offer more liquidity and flexibility of tenor.

FD vs PPF: Loan Availability 

You can avail a loan against your investment in both FDs and PPF. Let’s take a closer look at how they compare. 

 

1. Loan Against Fixed Deposit

In most cases, you can avail a loan against your fixed deposit at any point during the investment tenor. Typically, you can borrow up to 90% of the fixed deposit amount. In case you fail to repay the loan, the banks or NBFCs will recover the dues from the fixed deposit investment, which acts as collateral for your borrowing.

 

2. Loan Against PPF

You can avail a loan against your Public Provident Fund investment only after the expiry of one year from the end of the FY in which you made your investment. Also, this facility is available only before the expiry of five years from the end of the year in which you opened your account. 

 

There are other conditions too that you should be aware of, such as the following:

 

  • You can only borrow up to 25% of balance in your account as at the end of the second year immediately preceding the year in which you apply for the loan 

  • A second loan cannot be taken till you repay your first loan 

  • You can only take one loan per financial year

  • If you repay the loan within 36 months, interest will be applicable at the rate of 1% per annum 

  • If you take longer than 36 months, interest will be applicable at the rate of % per annum 

 

Clearly, loans against FDs have fewer conditions attached. The window for availing a loan is also longer in the case of loans against fixed deposits. 

FD vs PPF:  Difference between PPF and FD

The table below shows a comprehensive overview of the FD vs PPF comparison. This will help you get a better idea of how these two investment options stack up against each other in various areas. 

Parametres

Fixed Deposit (FD)

Public Provident Fund (PPF)

Issuing authority

NBFCs and banks

Government of India

Minimum deposit amount

May vary from ₹5,000 to ₹10,000

₹500 per financial year

Maximum deposit amount

No limit 

₹1.5 Lakh per financial year

Investment tenor

7 days to 10 years for bank FDs and 1 year to 5 years for NBFC FDs

15 years

Liquidity

Moderate

Low

Loan against investment 

Available at any time

Available only after the third financial year and up to the sixth financial year from the year of investment 

Joint account 

Allowed

Not allowed

Premature withdrawal

Permitted at any time subject to a penalty

Up to 50% of the balance can be withdrawn once per year after the completion of 5 financial years (excluding year of account opening)

Eligibility

Resident Indians, NRIs, HUFs, Trusts, Partnership Firms and Corporations

Available to Indian residents only

Tax benefits

Only available on the investment amount in the case of tax-saver FDs 

Available on the investment amount, interest earned and maturity proceeds

FD vs PPF: Which to Choose?

The answer to this depends on what you are looking for financially. For instance, if you are keen on having an investment option that offers more liquidity, fixed deposits may be more suitable. 

 

The PPF is a secure option, but it does not offer any liquidity for a minimum of five years. Even after this period, only partial withdrawals are allowed once a year. Hence, FD is a more liquid option when compared to PPF. Premature withdrawals, both partial and full, can be availed at any point in time, subject to a nominal penalty.

 

Similarly, if you want more flexibility in the tenor options, FDs can be easily customised to meet your financial needs. You can apply for an FD on Bajaj MARKETS in a hassle-free manner and enjoy benefits like a fast online application process and higher interest rates.

 

On the other hand, if you want more tax benefits or if you are looking for a long-term investment avenue, PPF may be a better choice. 

Conclusion

As you can see, both fixed deposits and the PPF have their own upsides. You can make a choice based on what you need financially. Consider the investment horizon of your financial goals, the reasons you are investing, the returns you expect and other such factors before you make a choice. 

FAQs on FD vs PPF

  • ✔️Which is better: PPF or FD?

    A fixed deposit has more liquidity as you can withdraw your FD at any given point by paying a nominal penalty for premature withdrawal. However, PPF has a 15-year lock-in period, thereby having low liquidity. In addition to this, the tenor of an FD is more flexible compared to PPF, thus making FD a better choice in terms of flexibility. 

     

    That said, PPF offers more extensive tax benefits. The principal investment, the returns earned and the withdrawal at maturity are all tax-free. So, if you’re comparing PPF vs fixed deposit as investment options, you can choose the one that offers the financial benefits you’re looking for.

  • ✔️Can I open a joint account if I am investing in an FD or in PPF?

    You can open a joint account in case of an FD. However, this is not true in the case of a PPF account. Each individual must have a separate PPF account. 

  • ✔️What should I consider before investing in an FD?

    Before investing in an FD, check for the interest rate offered by the bank or NBFC. Moreover, determine the investment amount you can afford and the tenor for the FD.

  • ✔️Which has more liquidity: FD or PPF?

    FD has more liquidity when compared to PPF. PPF has a 15-year lock-in period, whereas an FD has a flexible tenor between 7 days and 10 years.

  • ✔️Where should you invest: PPF or FD?

    That depends on your financial goals and your investment needs. Each investment option has its own pros and cons. 

     

    For instance, the maximum amount that can be invested in a PPF each year is ₹1.5 lakh. However, there is no such set limit with FDs. Also, a PPF has a lock-in period of 15 years, whereas an FD has more liquidity. In addition to this, an FD also has a non-cumulative option where a monthly, quarterly, half-yearly or an annual payout is provided. Hence, if you want to meet short-term financial goals and need frequent payouts, an FD can be a better choice.

     

    On the other hand, PPF offers more tax benefits and is a long-term investment option. So, you can choose this option if that is what you’re looking for.

  • ✔️What is the maximum amount that can be deposited into a PPF account in a year?

    You can invest up to ₹1.5 Lakh per year in your PPF account.

  • ✔️Is it possible to open an FD account as well as a PPF account?

    Yes, you can open a fixed deposit account as well as a PPF account in your name.

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