Fixed Deposit (FD) vs Public Provident Fund (PPF)
5paisa Research Team Date: 25 Apr, 2024 11:42 AM IST
Want to start your Investment Journey?
Content
- Meaning of a Fixed Deposit?
- Meaning of Public Provident Fund
- PPF vs. FD
- Interest Calculation for FDs and PPFs
- Fixed Deposit Suitability
- Public Provident Fund Suitability
- Benefits of a Fixed Deposit
- Benefits of a PPF Account
- Comparison of FD rates
Fixed Deposits (FDs) and Public Provident Funds (PPFs) are popular investment choices in India, each serving different financial needs and offering unique benefits. FDs are bank deposits with fixed interest rates and tenure, providing stability and predictable returns. On the other hand, PPFs are government-backed long-term investment options that offer tax exemptions and compound interest, suitable for retirement savings. While FDs are ideal for short to medium-term investments, PPFs are better for long-term financial planning due to their tax benefits and secure nature. Choosing between them depends on one's financial goals, risk appetite, and investment horizon.
Meaning of a Fixed Deposit?
A Fixed Deposit (FD) is a financial instrument offered by banks and non-banking financial companies where investors deposit a lump sum amount for a fixed period, earning a higher interest rate compared to savings accounts. The tenure can range from a few weeks to several years, and the interest rate remains constant regardless of market fluctuations. Upon maturity, the investor receives the principal amount along with the accrued interest. FDs are a popular choice for conservative investors seeking a safe and stable return on their capital without exposure to market risks.
Meaning of Public Provident Fund
A Public Provident Fund (PPF) is a long-term savings scheme backed by the government of India, offering tax-exempt returns. It is a popular investment vehicle particularly aimed at providing retirement security. Investors can contribute to their PPF account annually over a period of 15 years, which can be extended in blocks of 5 years. The interest rate on PPF is set by the government and is compounded annually. Contributions, interest earned, and the amount received upon maturity are all exempt from tax, making PPF an attractive option for tax-saving and accumulating a retirement corpus.
PPF vs. FD
When it comes to saving and investing, choosing the right vehicle can make a significant difference in financial outcomes. Two popular options in India are the Public Provident Fund (PPF) and Fixed Deposits (FDs). Each has unique features suited to different financial goals and risk appetites.
Public Provident Fund (PPF): PPF is a government-backed long-term saving scheme that encourages small savings offering tax benefits. The main attraction of PPF is its triple tax exemption status—exempt-exempt-exempt (EEE)—where the principal invested, the interest earned, and the returns are not taxed. The maturity period of a PPF account is 15 years, which can be extended in blocks of 5 years. The interest rates are decided by the government each quarter and are generally higher compared to regular savings accounts. PPF allows investors to make yearly contributions up to a specified limit, which qualifies for tax deductions under Section 80C of the Income Tax Act.
Fixed Deposit (FD): Fixed Deposits are investment instruments provided by banks and non-banking financial companies where money is deposited for a fixed period at a predetermined interest rate. The tenure of an FD can vary from 7 days to 10 years, offering flexibility in terms of investment duration. Interest rates are usually higher than those of savings accounts and are fixed for the term of the deposit, providing predictability in returns. FDs can be renewed upon maturity and typically offer higher interest rates for senior citizens. However, the interest earned on FDs is taxable according to the investor's tax bracket, and there are penalties for early withdrawal.
Comparison:
• Risk: Both PPF and FDs are considered low-risk investments. PPF carries a government guarantee, making it almost risk-free. FDs are also relatively safe, though they are subject to the financial health of the bank or institution.
• Returns: PPF generally offers higher effective returns due to its tax benefits. FD returns are fixed and can be calculated at the time of investment.
• Liquidity: FDs are more liquid compared to PPF. While FDs can be prematurely withdrawn (with penalties), PPF allows partial withdrawals only after the 6th year.
• Suitability: PPF is more suitable for individuals looking for long-term growth with tax benefits, ideal for retirement planning. FDs are better for those seeking short to medium-term investments or who may need access to their funds with relatively short notice.
Deciding between a PPF and an FD depends largely on the investor's financial goals, horizon, and need for liquidity. Both can be part of a balanced investment portfolio, addressing different needs and stages of financial planning.
Interest Calculation for FDs and PPFs
Interest on Fixed Deposits (FDs) is calculated using a simple interest formula or compound interest, depending on the bank’s policy. The rate is fixed for the term and interest can be compounded quarterly, half-yearly, or annually.
Public Provident Funds (PPFs) utilize compound interest, calculated annually on the minimum balance between the fifth and the last day of each month. The government sets the PPF interest rate quarterly, and it is compounded yearly, maximizing returns over its long tenure. Both FD and PPF interest calculations ensure that investments grow predictably over time.
Fixed Deposit Suitability
Fixed Deposits (FDs) are well-suited for investors seeking a safe and predictable return without exposure to market risks. They are ideal for those who have a lump sum amount that can be set aside for a fixed period, ranging from a few months to several years. FDs offer flexibility in terms of investment duration and interest payout options, making them suitable for short to medium-term financial goals, such as funding a major purchase or preparing for an upcoming expense. Additionally, FDs are preferred by conservative investors, including senior citizens, who often receive higher interest rates.
Public Provident Fund Suitability
The Public Provident Fund (PPF) is particularly suitable for individuals seeking long-term investment opportunities with significant tax benefits. It is ideal for those planning for retirement or long-term wealth accumulation due to its safe, government-backed nature and attractive compound interest. The PPF's tax-exempt status on deposits, interest, and maturity proceeds make it a powerful tool for tax planning. Its 15-year tenure, extendable in 5-year blocks, also encourages disciplined savings. PPF is best for investors who do not require immediate liquidity and are looking to build a substantial corpus over time.
Benefits of a Fixed Deposit
Fixed Deposits (FDs) offer several compelling benefits for investors. They provide a high degree of safety as FDs are insulated from market volatility, ensuring stable and predictable returns. Interest rates on FDs are usually higher than those on savings accounts, and these rates are fixed for the duration of the deposit, shielding investors from interest rate fluctuations. FDs are highly flexible, with a range of tenures to suit different financial needs and goals. Additionally, they allow for liquidity through premature withdrawals, albeit with potential penalties. FDs also often offer higher rates for senior citizens, enhancing their appeal to older investors.
Benefits of a PPF Account
A Public Provident Fund (PPF) account offers several benefits, making it a popular investment choice. The most notable is its tax-efficient nature; contributions, interest earned, and maturity proceeds are all tax-exempt under the EEE (Exempt-Exempt-Exempt) model. The government backing ensures a secure investment, coupled with attractive compound interest rates that are revised quarterly. The PPF has a long tenure of 15 years, extendable in 5-year blocks, promoting long-term savings discipline. It also allows for partial withdrawals and loans against the balance from the 6th year, adding a degree of liquidity to the investment.
Comparison of FD rates
More About Savings Schemes
- Corporate Fixed Deposit
- Fixed Deposit (FD) vs Recurring Deposit (RD)
- Short Term Fixed Deposit
- Senior Citizen FD Interest Rates 2024
- Post Office FD Interest Rates 2024
- Monthly Interest Payout Fixed Deposit(FD)
- Fixed Deposit Sweep In Facility
- Credit Card against Fixed Deposit
- Fixed Deposit (FD) vs Public Provident Fund (PPF)
- Corporate FD vs Bank FD
- Income Tax on Recurring Deposit RD
- How to Withdraw Money from Unclaimed EPF Account
- How to Get Your Name Changed in the EPF
- Steps to Upload KYC for EPF UAN
- EPF Payment
- Difference between GPF, EPF, and PPF
- Difference Between APR vs APY
- Atal Pension Yojana Tax Benefits
- How To Open Atal Pension Yojana (APY) Account Online
- How to Close Atal Pension Yojana Account
- How to Change Details in Atal Pension Yojana Scheme
- NPS v/s SIP
- NPS Lite Aggregators List
- NPS Customer Care Number
- National Pension Scheme for NRI
- National Pension Scheme (NPS) Withdrawal Rules
- Best Child Investment Plans In India
- Post Office PPF Account
- PPF Account Withdrawal Rules
- PPF Deposit Limit
- PPF Account Age Limit
- PPF Account for Minors
- PPF Online Payment
- ELSS Vs PPF
- Loan Against PPF
- Post Office PPF Interest Rate
- PPF Interest Rates 2023 - 24
- What is Pradhan Mantri Jan Arogya Yojana
- Balika Samridhi Yojana
- What is member ID in PF?
- How To Merge Two UAN Numbers Online
- How to Merge Two PF Accounts?
- How to Raise Grievance in EPFO
- How to Check PF Balance in Mobile: A Comprehensive Guide
- How to Download Your EPF Passbook: A Comprehensive Guide
- TDS on PF Withdrawals: A Comprehensive Guide
- How to Transfer Your PF from One Company to Another?
- EPF vs PPF
- PF Balance Check with UAN Number Without Password
- PF Balance Check without UAN number
- Introduction to Savings Schemes
- Difference Between VPF And PPF
- EPF Form 10D
- NPS vs PPF
- Superannuation Meaning: What is Superannuation
- What is Fixed Deposit?
- Pradhan Mantri Awas Yojana
- Atal Pension Yojna vs NPS
- NPS (National Pension Scheme Charges)
- EPF vs EPS
- EPF Form 2
- What are Tier 1 and Tier 2 in NPS?
- NPS Tier 2
- NPS Tier 1
- Senior Citizen Saving Scheme (SCSS)
- General Provident Fund (GPF)
- Pension Fund Regulatory & Development (PFRDA)
- SBI Annuity Deposit Scheme
- GPF Interest Rates 2023
- Unit Link Insurance Plan (ULIP)
- List of Bank Mergers
- PRAN Card
- Foreign Currency Non Resident Account (FCNR)
- What is EDLI?
- What Is NPS Interest Rates?
- What is Form 15g
- Saksham Yuva Yojana
- Why Invest in PPF?
- How To Check PPF Account Balance
- NSC Interest Rate
- NSC – National Savings Certificate
- Swavalamban Pension Yojana
- KVP Interest Rate
- PF Withdrawal Rules 2022
- NPS Returns
- National Pension Scheme (NPS)
- Jeevan Pramaan Patra - Life Certificate for Pensioners
- Kisan Vikas Patra (KVP)
- PF Form 19
- PF Withdrawal Form
- EPS - Employee Pension Scheme
- PPF Withdrawal
- Atal Pension Yojana (APY)
- EPF Form 5
- EPF Interest Rate
- Check Your PF Balance Online
- Employee Provident Fund (EPF)
- UAN Registration & Activation Online
- UAN Member Portal
- Universal Account Number
- National Savings Scheme
- Post Office Tax Saving Schemes
- Post Office Monthly Income Scheme
- Post Office Savings Schemes
- EPF Claim Status
- EPF Form 31
- EPF Form 10C Read More
Open Free Demat Account
Be a part of 5paisa community - The first listed discount broker of India.
Frequently Asked Questions
Yes, you can extend the life of your PPF account in blocks of 5 years after its initial maturity period of 15 years, without any limit on the number of extensions. You can choose to continue with or without additional contributions during the extension.
Yes, it is possible to start a savings account online. Most banks offer digital services that allow you to open and manage savings accounts entirely via their websites or mobile apps, providing convenience and accessibility from anywhere.
Choosing between FD (Fixed Deposit), RD (Recurring Deposit), and PPF (Public Provident Fund) depends on your financial goals, risk appetite, and need for liquidity. FDs are best for lump-sum investments, RDs for regular savings, and PPFs for long-term, tax-free growth and retirement planning.
Whether PPF (Public Provident Fund) or FD (Fixed Deposit) is better depends on your financial goals. PPF offers long-term growth with tax benefits, ideal for retirement saving, while FD provides short to medium-term stability and predictable returns, with higher liquidity.
A bank fixed-income investment typically involves products like savings accounts and CDs, offering lower risk and returns. Firm fixed-income investments, such as corporate bonds, generally provide higher returns but carry increased risk due to potential default by the issuing company.